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Hello Mike
Hope you are fine :).My question is about sale & leaseback (operating lease). As far as I understand your P2 note says when Sale Price = Fair Value, then we should recognise the profit (or loss) IMMEDIATELY! ( Also when I solve questions of Kaplan the same rule works).
But the problem is that when I want to solve the question ”Holcombe” (The 4th question of June 2010), Part B, the answers says something else!
In this question, the SP=FV, but the profit is NOT recognised immediately and the profit is deferred ! I mean the profit is 30M, the lease period is 5 years and each year 6M of the profit is recognised.
Would you please tell me why?As always, thank you in advance
Kind RegardsI don’t have the question easily to hand and am not likely to be within reach of a good Internet connection for a few days.
What was the carrying value of the asset as at the date of sale and leaseback?
If you’ll give me that information, yours will be the last post on this thread so I’ll see it when my own situation improves and answer it then
Sorry for not being able to respond in a timely manner
Hello Mike
Thanks with your reply.The part of the question that is related to this problem is as follows : (Q4- June 2010 ACCA exam)
Holcombe also owns an office building with a remaining useful life of 30 years. The carrying amount of the building is $%120 million and its fair value is $150 million. On 1 May 2009, Holcombe sells the building to Brook, a public limited company, for its fair value and lease it back for five years at an annual rental payable in arrears of $16M on the last day of the financial year (30 April). This is a fair market rental. Holcombe’s incremental borrowing rate is 8%.
Thank you in advance
Hi Yellow
Thank you for your patience. I’m still not in a position to have easy access to my computer that is 3,000 kilometers away.
However, you’ve waited long enough, so I’ll struggle with my iPad!
I think the key to the problem and apparent inconsistency lies within the core of the question – the debate about the inconsistency of current accounting standards in part (a)
Part (b) of the question asks you how you would deal with the disposal
“assuming that the operating lease is recognized as an asset” but that is contrary to the current thinking as at June 2010Does that answer it for you?
And sorry for the excessive delay 🙁
Hello Mike.
Thanks with your reply. It is very kind of you that you did not forget to answer my question even when you are such busy. Many thanks.
What I got from your answer is that, there is no problem with the rule ( when SP = FV, we should recognised the profit immediately). But in this question, because we are assuming that the operating leaseback is (wrongly) recognised as a finance leaseback, so we are deferring the profit. Right?
Kind Regards
The issue is about whether the current accounting standard is “sensible”. There is, even to this day, extensive debate and your examiner was merely asking what do students think to be the “sensible and rational”
Ok?answer
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