Sale and Leaseback Transactions that Result in Operating Leases :
The illustration does not form part of the accounting standard. Its purpose is to illustrate the application of the accounting standard.
A sale and leaseback transaction that results in an operating lease may give rise to profit or a loss, the determination and treatment of which depends on the leased asset’s carrying amount, fair value and selling price. The following table shows the requirements of the accounting standard in various circumstances.
Sale price established at fair value (paragraph 50) | Carrying amount equal to fair value | Carrying
amount less than fair value |
Carrying amount
above fair value |
Profit | No profit | Recognise profit immediately | Not applicable |
Loss | No loss | Not applicable | Recognise loss immediately |
Sale price below fair value (paragraph 50) | |||
Profit | No profit | Recognise profit immediately | No profit (note 1) |
Loss not compensated by future lease payments at below market price | Recognise
loss immediately |
Recognise loss immediately | (note 1) |
Loss compensated by future lease payments at below market price | Defer and amortise loss | Defer and amortise loss | (note 1) |
Sale price above fair value (paragraph 50) | |||
Profit | Defer and amortise profit | Defer and amortise profit | Defer and amortise profit
(note 2) |
Loss | No loss | No loss | (note 1) |
Note 1. These parts of the table represent circumstances that would have been dealt with under paragraph 52 of the Standard. Paragraph 52 requires the carrying amount of an asset to be written down to fair value where it is subject to a sale and leaseback.
Note 2. The profit would be the difference between fair value and sale price as the carrying amount would have been written down to fair value in accordance with paragraph 52.