Sale and Leaseback Query (Chapter 18 - page 87)

SCENARIO 1 LEASE TERM = ASSET LIFE THEREFORE NOT A SALE IN SUBSTANCE IT IS A LOAN SECURED ON THE PPE SO SELLER HAS FINANCIAL LIABLITY AND BUYER HAS A FINANCIAL ASSET. SELLER KEEPS PPE ON SFP. SCENARIO 2 LEASE TERM LESS THAN ASSET LIFE THIS IS A SALE AND LEASEBACK SELLER DERECOGNISES PPE AND RECOGNISES RIGHT OF USE ASSET INSTEAD. SELLER ALSO RECOGNISES LEASE LIABILITY. BUYER WILL EITHER TREAT LEASE AS FINANCE OR OPERATING LEASE, DEPENDING ON TERM OF LEASE COMPARED TO ASSET LIFE. :)

Hi Stephen, Happy new year and thank you for your answer! Sorry to go back to basics here but could you please explain the difference between an asset and a financial asset? As in scenario 1, buyer is not recognising an asset but is recognisinig a financial asset? Otherwise I have re-watched the lecture with you response in mind and I've understood the concept :)

Assets = INTANGIBLES + PPE + INVESTMENT PROPERTY + INVENTORY + FINANCIAL ASSETS Financial assets = EQUITY INVESTMENTS + ANY CONTRACTUAL RIGHT TO RECEIVE CASH In our note 'asset' is referring to the physical asset such as PPE. 'Financial asset' is referring to the lease receivable'. I will try and clarify this in the next edition.