Substance over Form – Accounting for Sale and Leaseback

Have the methods for the above changed in the past at all?

This is an extract from a question from the F7 paper in December 2003:

Sales Revenue includes $50 million for an item of plant sold on 1 june 2003.the palnt had a book of $40 million at the date of its sale,which was charged to cost of sales.on the same date,Tourmalet entered into an agreement to lease back the plant for the next 5 years (beeing the estimated remaining life of the plant) at a cost of $14 million per annum payable annually arrears.an arrangement of this type is deemed to have a financing cost of 12% per annum.No depreciation has been charged on the itemof plant in the current year.

The answer to this question suggested that this was not a finance lease in substance but actually a secured loan for $50m. Was this the right treatment using FRS5 once upon a time?

However, according to IAS 17 and using an almost identical example from my current study text the treatment is now different? The sale and finance leaseback is no longer treated as a secured loan but as a sale and finance lease but the profit made on sale is deferred over the period of the lease.

So in the above example the sale is for $50m but the $10m in excess of carrying value is deferred over the remaining life of the asset, i.e. 5 years and therefore profit would be ‘released’ at $2m a year?

Is this the correct treatment nowadays? I’m so confused so any help would be much appreciated!!!