CHAPTER 16 – SALE AND LEASEBACK

Sale and Leaseback

It is an arrangement whereby one party sells an asset to another party and them immediately
leases the asset back from the new owner.

Transfer of the asset is a sale

Transfer of an asset must satisfy the requirements for the recognition of sale in order to be
accounted for as sale and leaseback.

First – There is a sale

Second – There is a lease agreement for the same asset in which the seller is the lessee and the
buyer is the lessor.

Illustration – Sales Price at fair Value

At the beginning of the year an entity sold a machinery with a remaining life of 10 years for
P2,000,000 which is equal to the fair value of the machinery.

The entity leased the machinery back for 1 year at the prevailing annual rental of P3,000,000

The machinery has a carrying amount of P1,800,000, net of accumulated depreciation of

P1,200,000

Books for the seller – Lessee

1. Cash 2,000,000
Accumulated depreciation 1,200,000
Machinery 3,000,000
Gain on right transferred 200,000

2. Rent expense 300,000

Cash 300,000

Books of the buyer – Lessor

1. Machinery 2,000,000
Cash 2,000,000

2. Cash 100,000
Rent Income 100,000

3. Depreciation 200,000
Accumulated depreciation 200,000
 (2,000,000 / 100)

Gain or Loss to be recognised

The right retained by the seller - lessee is the proportion of the initial lease liability in relation to
the fair value of the asset.

Sale right at fair value 6,000,000

Carrying amount 4,500,000

Total gain 1,500,000

Fair value 6,000,000

Right retained by seller – Lessee equal to lease liability 2,536,000

Right transferred to buyer – Lessor 3,464,000

Gain to be recognized (3,464,000/6,000,000 x 1,500,000 866,000

Gain not to be recognized 634,000

(2,536,000/6,000,000 x 1,500,000)

Total Gain 1,500,000

Transfer of sale is not a sale

If transfer of an asset by seller – Lessee does not satisfy the requirements for the recognition of
sale:

a. Seller shall continue to recognize the transferred asset and shall recognize a financial
liability equal to the transfer proceeds

b. The buyer shall not recognize the transferred asset but shall recognize a financial asset
equal to the transfer proceeds.