ExpertHard2 marksMultiple Choice
ACCA · Question 04 · Leases
Section A
AeroFreight sold a cargo aircraft to a leasing company for its fair value of $40 million. The carrying amount prior to the sale was $30 million. AeroFreight immediately leased the aircraft back for 5 years. The present value of the lease payments is $24 million. The transfer qualifies as a sale under IFRS 15.
What is the gain on rights transferred to the buyer-lessor to be recognized in AeroFreight's profit or loss?
Section A
AeroFreight sold a cargo aircraft to a leasing company for its fair value of $40 million. The carrying amount prior to the sale was $30 million. AeroFreight immediately leased the aircraft back for 5 years. The present value of the lease payments is $24 million. The transfer qualifies as a sale under IFRS 15.
What is the gain on rights transferred to the buyer-lessor to be recognized in AeroFreight's profit or loss?
Answer options:
A.
$10.0 million
B.
$6.0 million
C.
$4.0 million
D.
$24.0 million
How to approach this question
Calculate the total gain on sale. Then, determine the proportion of the asset's fair value that was transferred to the buyer (1 - (PV of lease / FV)). Multiply the total gain by this proportion.
Full Answer
C.$4.0 million✓ Correct
Under IFRS 16 Sale and Leaseback, if the transfer is a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount retained. The gain recognized is limited to the proportion of the total gain relating to the rights transferred. Total gain = $10m. Rights retained = 24/40 = 60%. Rights transferred = 40%. Recognized gain = 40% * $10m = $4.0m.
Common mistakes
Recognizing the full $10m gain, which was the old IAS 17 treatment for operating leases.
Practice the full ACCA FR — Financial Reporting Practice Exam 4
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