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Section ACCA Study Hub

The document discusses accounting for transfers that qualify as a sale in a sale-and-leaseback arrangement. When a transfer qualifies as a sale, the seller recognizes cash received, derecognizes the transferred asset, recognizes a right-of-use asset for any leased back portion, recognizes a lease liability, and recognizes any gain or loss from the sale portion. The example shows how to allocate the previous carrying amount and total gain or loss between the portion transferred and the portion retained as a right-of-use asset.

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916 views1 page

Section ACCA Study Hub

The document discusses accounting for transfers that qualify as a sale in a sale-and-leaseback arrangement. When a transfer qualifies as a sale, the seller recognizes cash received, derecognizes the transferred asset, recognizes a right-of-use asset for any leased back portion, recognizes a lease liability, and recognizes any gain or loss from the sale portion. The example shows how to allocate the previous carrying amount and total gain or loss between the portion transferred and the portion retained as a right-of-use asset.

Uploaded by

laayba
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

 Table of Contents Next 

4.2 Transfer is a Sale

If the transfer qualifies as a sale the


seller/lessee:

Recognises the cash received;


Derecognises the asset transferred;
Recognises a right-of-use asset for the part
of the asset leased back;
Recognises a lease liability; and
Recognises the gain or loss on the portion
of the asset transferred to the buyer/lessor.

This involves pro-rating the carrying amount of


the derecognised asset and the total gain or
loss (see Example 7).

Example 7 Sale and Leaseback

Haugh Co entered into a sale and


leaseback arrangement on 1 January 20X7
to sell an asset to CC Finance Company
(CCFC) for $750,000 being the fair value of
the asset. The asset had a carrying amount
of $640,000 at that date and the agreed
lease term was five years.

The terms of the leaseback require Haugh


Co to pay $120,000 per annum in advance
for five years. Haugh Co’s incremental
borrowing rate is 5%, giving an initial lease
liability before any payments are made to
CCFC of $546,000.

The previous carrying amount of the asset


is allocated between the transferred amount
and the right-of-use asset retained based
on the rights retained as a proportion of fair
value:

Carrying amount:

right-
of-use asset

asset transferred

The total gain of $110,000 ($750,000 −


$640,000) is also apportioned on the same
basis:

gain
relating to retained right-of-use
(therefore not recognised)
$110,000 − $80,080 = $29,920 gain
relating to asset transferred (and
therefore recognised by Haugh Co)

The transaction is recorded as follows:

Dr Cash $750,000
Dr Right-of-use
asset $465,920
Cr Lease
liability $546,000
Cr Gain $29,920
Cr Property,
plant and
equipment $640,000

Category
14.4 Sale and Leaseback

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  6 

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