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In the case of sale and operating leaseback , do we do this
Deduct the sale value
And add rental charge to profit n loss account
And adjust any profit and loss?Accounting treatment for sale and operating leaseback depends on the sales proceeds vs. fair value of the asset and the actual rental price vs. market rental price. If I’m not wrong there are 5 possible situations :
1. Sales proceeds = Fair value, Actual rental price = Market rental price : normal situation, any profit/loss go to P&L, rental expensed off as usual
2. Sales proceeds > Fair value, Actual rental price > Market rental price : creative accounting, actually a loan without a liability in SoFP, excess of sale proceeds over fair value treated as a loan, difference between actual rental price and market rate treat as loan instalment
3. Sales proceeds < Fair value, Actual rental price = Market rental price : normal situation, maybe because of cash flow problem, entity has to sell off its asset for cash and rent it back, any profit/loss go to P&L, rental expensed off as usual
4. Sales proceeds < Fair value, Actual rental price < Market price : creative accounting, actually a way of profit smoothing to defer profit to future periods, loss deferred and amortised over the period of the lease
5. Sales proceeds > Fair value, Actual rental price = Market rental price : also a way of creative accounting to boost profit at year end, excess of sale proceeds over fair value deferred and amortised over period of the lease
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