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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-20/” type=”big” color=”red”] Return to Section 20 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Sale and leaseback transactions
Extract from FRS 102 – Section 20.32-20.34
20.32 A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends on the type of lease.
Sale and leaseback transaction results in a finance lease
20.33 If a sale and leaseback transaction results in a finance lease, the seller-lessee shall not recognise immediately, as income, any excess of sales proceeds over the carrying amount. Instead, the seller-lessee shall defer such excess and amortise it over the lease term.
Sale and leaseback transaction results in an operating lease
20.34 If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, the seller-lessee shall recognise any profit or loss immediately. If the sale price is below fair value, the seller-lessee shall recognize any profit or loss immediately unless the loss is compensated for by future lease payments at below market price. In that case the seller-lessee shall defer and amortise such loss in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the seller-lessee shall defer the excess over fair value and amortise it over the period for which the asset is expected to be used.
OmniPro comment
A sale and leaseback occurs where an entity sells an asset and immediately reacquires the use of the asset by entering into a lease with the buyer. They are usually used to get access to funds.
Where a sale and leaseback occurs and where there is a finance lease created the asset should not be derecognised, instead the proceeds received should be credited to the profit and loss over the life of the lease.
Example 8: Sale and leaseback
Company A owned a property which had a net book value at year end of CU100,000 and had a remaining useful life of 28 years. On the last day of the year the company entered into an agreement whereby it sold the property for CU500,000 and as part of the agreement leases this back from the purchaser for a 25 year period. The annual lease rentals on the property is CU70,000. Given that in substance the company still has the risk and rewards of ownership, the company should account for this transaction as follows:
|
|
CU |
CU |
|
Dr Bank |
500,000 |
|
|
Cr Fixed Assets |
|
100,000 |
|
Cr Accuals/Deferred Income |
|
400,000 |
Being journal to reflect proceeds from the transaction
|
|
CU |
CU |
|
Dr Fixed Asset |
500,000 |
|
|
Cr Finance Lease Liability |
|
500,000 |
Being journal to recognise acquisition of the property under finance lease assuming this equated to fair value
The accrual/deferred income is allocated over the remaining life of the lease each year i.e. CU400,000 / 25 years = CU16,000 per annum. Therefore on a yearly basis the below journal will be posted:
|
|
CU |
CU |
|
Dr Accruals/Deferred Income |
16,000 |
|
|
Cr Rental Costs P&L |
|
16,000 |
Each year depreciation will be charged on the CU500,000 over its lease term.
The finance lease interest is debited to the profit and loss over the life of the lease as with any other finance lease. The net amount of the depreciation and the rental credit will equate to the previous depreciation that was charged on that asset.
Where the lease is not deemed to be a finance lease, then the it is an operating lease and the asset can be derecognised and the profit/loss can be recognised in the P&L. The only exception to this rule is where the sales prices was not at market value i.e. above or below market value and instead the rent is below/in excess of market rent. In this case the loss/profit should be deferred and amortised over the period for which the asset is expected to be used.
For the purchaser it would be a mirror picture.
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