SellCo sells a building to BuyCo for cash of CU1,800,000, which is its fair value at that date. The previous carrying value of the building is CU1,000,000. At the same time, SellCo enters into a lease with BuyCo conveying back the right to use the building for 18 years. Annual payments are CU120,000 payable at the end of each year, which is at market rate. The transfer qualifies as a sale based on the guidance on satisfying a performance obligation in IFRS 15. The rate implicit in the lease is 4.5%, which is readily determinable by SellCo.
SellCo The case – Sale and leaseback
The present value of the annual payments (18 payments of CU120,000, discounted at 4.5%) is CU1,459,200. SellCo measures the right-of-use asset retained through the leaseback as a proportion of the previous carrying amount of the building. This is calculated as: CU1,000,000 (previous carrying value) x [CU1,459,200 (PV of lease payments)/ CU1,800,000 (fair value of building)]. The right-of-use asset calculated in this way is CU810,667. SellCo recognises a portion of the total gain on the sale, to the extent it relates to the rights retained in the underlying asset by BuyCo at the end of the leaseback. The total gain on sale of building is CU800,000 (CU1,800,000 – CU1,000,000). This total is split into:
- the portion relating to the rights to use the building retained by SellCo, calculated as CU800,000 x [CU1,459,200/ CU1,800,000] which is CU648,533; and
- the portion relating to BuyCo’s rights in the underlying asset at the end of the leaseback, calculated as CU800,000 x [(CU1,800,000 – CU1,459,200)/CU1,800,000], which is CU151,467.
At the commencement date, SellCo’s accounting entries are: The case – Sale and leaseback
BuyCo The case – Sale and leaseback
At the commencement date, BuyCo’s accounting entries are: The case – Sale and leaseback
BuyCo classifies the lease as an operating lease taking into account, among other things, that the present value of the lease payments is 19% less than the fair value of the building. BuyCo accounts for the lease accordingly