ExpertHard2 marksMultiple Choice
ACCA · Question 08 · IFRS 16 Leases
Section A
LogisFast, a logistics company, sold its main distribution hub to a finance house for $10 million (which is its fair value) and immediately leased it back for 15 years. The carrying amount of the hub prior to the transaction was $6 million. The transaction satisfies the requirements of IFRS 15 to be accounted for as a sale. The present value of the lease payments is $8 million.
What amount of profit on the sale should LogisFast recognize immediately in profit or loss?
Section A
LogisFast, a logistics company, sold its main distribution hub to a finance house for $10 million (which is its fair value) and immediately leased it back for 15 years. The carrying amount of the hub prior to the transaction was $6 million. The transaction satisfies the requirements of IFRS 15 to be accounted for as a sale. The present value of the lease payments is $8 million.
What amount of profit on the sale should LogisFast recognize immediately in profit or loss?
Answer options:
A.
$4,000,000
B.
$800,000
C.
$3,200,000
D.
$0
How to approach this question
In a sale and leaseback that qualifies as a sale, the seller-lessee only recognizes the proportion of the gain that relates to the rights transferred to the buyer-lessor. Calculate total gain, then multiply by (1 - (PV of lease payments / Fair value)).
Full Answer
B.$800,000✓ Correct
1. Total apparent gain = Fair Value ($10m) - Carrying Amount ($6m) = $4m.
2. The proportion of the asset retained by LogisFast = PV of lease payments / Fair Value = $8m / $10m = 80%.
3. The proportion of the asset transferred to the finance house = 20%.
4. Under IFRS 16, the seller-lessee only recognizes the gain relating to the rights transferred: 20% x $4m = $0.8m ($800,000).
Common mistakes
Recognizing the full $4m profit, which was the old IAS 17 treatment for operating sale and leasebacks.
Practice the full ACCA FR — Financial Reporting Practice Exam 5
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