Sale and Leaseback transactions

Question 1

How do you account for a sale and leaseback transaction?

Answer 1

1. Measure the right of use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that related to the right of use retained by the seller/ lessee.

CA x PVFLP/ FV

2. recognise only the amount of any gain/ loss on the sale that relates to the rights transferred

i. calculate gain.

FV (proceeds) less carrying amount

ii. calculate gains that relate to rights retained.

gain x PVFLP/ FV

iii. gain relating to rights transferred is a balancing figure.

gain on rights transferred = total gain - rights retained (i - ii) which recognised as gain in p/l

Question 2

What is the exam treatment for a transaction that is a not a sale?

Answer 2

1. the seller must continue to recognise the transferred asset
2. the transfer proceeds are treated as a financial liability - amortised cost basis.

in substance this is a secure loan.