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A sale and leaseback transaction involving a large property complex was entered into on 31st January 20×9.
The property complex is a large warehousing facility, which was sold for 37m which is both its fair value at the date of disposal and the present value of the lease payments. Setter stores co retains control of the use of the asset.
The lease term is 20 years the same as the asset useful life of the property.The facility was held under the cost model together with other assets of its class at its carrying amount that date of 27m
Setter stores co has made accounting entries to recognise the cash received and a non current liability classified as a lease liability. It has recognised a revaluation gain on the property asset of 10m.
Answer:
The asset has not been transferred in line with IFRS 15 because setter stores still has control. The cash received is therefore a secured loan, to be accounted for as a financial liability under IFRS 9. This is not a lease under IFRS 15.
The full amount of the cash received is recognised as a financial liability. The property is held under the cost model of IAS 16 and continues to be recognised at its carrying amount of 27m. It is not revalued.
Setter stores has therefore wrongly recognised a revaluation gain of 10m. The gain should be reversed so that the asset is held under the cost model.
The financial liability is initially recognised at fair value of the consideration received which is 37m. This appears to have been done correctly. The liability should be held at amortised cost, being amortised over 20 years. This would result in other income recognised in the sofpl. This would be 1.85m each year (37 /20 years).
As the lease is for 20 years the effect of discounting is likely to be material. The liability should be recognised at its present value, with the effect of discounting being recognised as a finance cost in future periods.
I agree with most of the answer however cannot get the rationale behind recognising income of 1.85m each year. Aren’t we talking about a liability here so shouldn’t we be paying finance costs?
This Q was first set in J13 pre-IFRS 15/IFRS 16 and you are looking at an adaptation of it. You would really have to ask the publisher where the $1.85 comes from, but I suggest it goes like this …
If you take the information at face value you have $37m cash now and a corresponding liability. However, since nothing is said about repayment in 20 years’ time the liability then will be $0. So what the answer is doing is amortising the liability over 20 years. In the absence of an effective interest rate this has been done straight-line.
I agree this is strange because whoever paid $37m appears to have no consideration (because the asset’s useful life is 20 years).
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