Chapter 15 – SALE AND LEASE BACK Dep’n.

200T *To record depreciation of

=an arrangement whereby one party sells an asset
to another party and then immediately leases the
asset back from the owner.
Seller: Seller-Lessee
Buyer: Buyer-Lessor
= this occurs when the seller-lessee is experiencing
cash flow or financing problem or because there
are tax advantages in such an arrangement in the
lessee’s jurisdiction.
= Or that, the seller-lessee would like to avoid the
burden of paying the executory costs attendant to
the asset e.g. repairs, insurance and taxes.
AccDep’n. 200T the Machinery
Illustration: Sale Price at Fair Value With Gain
Lessor sold equipment on Jan 1 with remaining UL of 10yrs and
immediately leased it back for 4yrs at the prevailing market
rental. Sale Price at FV = 6M; Equipt-CA = 4.5M; Annual rent
every 12/31 = 800T; Implicit Int Rate = 10%
*The Seller-Lessee shall account for the leaseback as a
Finance Lease.
1. PV of LL = PV of Lease Payments = RR by SL
PV of LL (800T X 3.17) = 2,536,000
*Proceed with the Table of Amortization*
*IFRS 16, P.100, provides that the Seller-Lessee shall
measure the Right of Use Asset at the proportional amount of
Right of Use retained by Seller-Lessee (PV of LL) over FV
multiplied to the Previous CA of Asset.

IFRS 16,P.100: The transfer of an asset must

2. Compute for the cost of RUA
satisfy the requirements for the recognition of RR by SL 2536T 1902T RUA
sale in order to be accounted for as sale and FV 6000T 4500T CA of UA
leaseback.
IFRS 16, P. 100: GAIN or LOSS that pertains to the:
*NOTE that there is NO physical transfer of  Right Retained (RR) by Seller-Lessee, and
 Right Transferred (RT) to Buyer-Lessor
asset. Only that there should be:
3. Compute for the Total Gain.
1. A Sale; & = the total gain contains both the Gains pertaining
2. A Lease Agreement for the same asset to RR and RT.
in which the seller is the lessee and the Sale Price at FV 6M
Carrying Amount 4.5M
buyer is the lessor. Total Gain. 1.5M
*The lease rent and sale price are usually 4. Compute for the RR by SL and RT to BL
Interdependent as they are negotiated as a Fair Value. 6M
RR by SL (Lease Liab) 2536T
package.
RT to BL 3464T
*Common Accounting issues is S&L: *GAIN OR LOSS that pertains to the Right Retained by
1. Sale Price at Fair Value seller-lessee is NOT RECOGNIZED
2. Sale Price at Fair Value With Gain *GAIN OR LOSS that pertains to the Right Transferred to
the Buyer-Lessor is RECOGNIZED
3. Sale Price at Fair Value With Loss
5. Get the proportional Amount of the Gains that
4. Sale Price above Fair Value pertain to the RR by SL and RT to BL from the
5. Sale Price below Fair Value total gain.
6. Transfer of Asset is Not a Sale
RR by SL. 2536T 634T (Not Recognized)
*Illustration – Sale Price at Fair Value RT to BL. 3464T 866T (Recognized)
Lessor sold a machinery on Jan 2020 for 2M, which is also the Total 6000T 1500T Total Gain
Fair Value of the Machinery. Books of Seller - Lessee
The Lessee immediately leased the machinery back for 1 year Cash 6M *To record the Sale And
at the prevailing annual rental of 300T; RUA. 1902T Leaseback.
Machinery-CA = 1.8M, net of AccDep’n of 1.2M Equipt 4.5M *The seller-lessee shall apply
Books of Seller - Lessee Lease Liab 2536T the Finance Lease model
Cash 2M *To record the Sale Gains on RT. 866T
AccDep’n 1.2M Selling Price 2M Int Exp 253600 *To record the Annual Rental
Machinery 3M Mach-CA (3M-1.2M). (1.8M) Lease Liab. 546400 for the first year
Gain on rights Gain on rights Cash 800T IE = (2536T X .10)
Transferred 200T Transferred 200T Dep’n exp. 475500 *To record annual Dep’n
Rent Exp 300T *To record Annual Rental AccDep'n. 475500 (1902T/4yrs) based on RUA
Cash 300T Books of Buyer - Lessor
Books of Buyer - Lessor =shall apply the Operating Lease model if Lease term is below
Machinery. 2M *To record the Purchase 75% of the Useful Life of the Underlying Asset
Cash. 2M Equipt *To record purchase of the
Cash. 100T *To record the Annual Rental Cash asset
Rent income 100T Cash. 800T *To record the Annual Rental
 Rent Income 800T Seller-Lessee shall make ADJUSTMENTS to the PV of Lease
Dep'n 600T *To record dep’n of Asset Liability to recognize the excess of the Sale Price over FV.
AccDep'n 600T based on the Purchase price *The goal is to make it seem like SP = FV
(6,000T/10yrs) *In concept then (for computation), the Sale Price is Equal to
Fair Value so it would seem like SP = FV = 18M and so what
happens now to the Excess 2M?
Illustration – Sale Price at Fair Value With Loss *The Excess Sale Price over FV shall be accounted for as
Lessor sold a bldg with remaining UL of 25yrs and immediately Additional financing provided by the BL to SL.
leased it back for 3yrs; Sale Price at FV = 10M; Bldg-CA = 12M *In effect and to recognize the additional financing, this will
Annual Rent every 12/31 = 500T; Implicit Int Rate = 8% reduce the amount of PV of Lease Liability or “RR by SL”
1. Get the PV of LL or the RR by SL *But this adjustment is only for the computation of other
PV of Lease Liability = (500T X 2.58) = 1290T accounts stated below. The Lease Liab will still be at orig. PV
*Proceed with Table of Amortization 7. Get the Excess Sale Price
2. Compute for the cost of RUA Sale Price 20M
RR by SL 1290T 1548T RUA FV of Bldg 18M
FV 10M 12M CA of UA Excess Sale Price over FV. 2M
8. Adjust the PV of Lease Liability
PV of LL 5.4M
IFRS 16, P. 100: GAIN or LOSS that pertains to the: Additional financing (2M) (FA to BL)
 Right Retained (RR) by Seller-Lessee, and PV of LL related to rentals 3.4M (RR by SL)
 Right Transferred (RT) to Buyer-Lessor 9. Compute for the RUA
3. Compute for the Total Loss.
= the total Loss contains both the Loss pertaining
to RR and RT. RR by SL 3400T 2040T RUA
Sale Price at FV 10M FV 18000T 10800T CA of UA
Carrying Amount 12M 10. Compute for the Total Gain.
Total Loss. (2M) = in case SP ≠ FV, then whichever is higher between
4. Compute for the RR by SL and RT to BL Sale price and FV is the basis in getting the total
Fair Value. 10M gain, because the concept provides for Sale price
RR by SL (Lease Liab) 1290T to measure at the Amount of FV.
RT to BL 8710T =in this case, Sale Price is the basis.
5. Get the proportional Amount of the Loss that
pertain to the RR by SL and RT to BL from the Sale Price 20M
total Loss. Carrying Amount 10.8M
Total Gain. 7.2M
RR by SL. 1290T 258T (Not Recognized) 11. Compute for the RR by SL and RT to BL
RT to BL. 8710T 1742T (Recognized) Fair Value. 18M
Total 10M 2000T Total Loss RR by SL (Lease Liab) 3.4M
Books of Seller - Lessee RT to BL 14.6M
Cash 10M 12. Get the proportional Amount of the Gains that
RUA. 1548T pertain to the RR by SL and RT to BL from the
*To record the Sale And total gain.
Loss on RT 1742T
Leaseback.
Bldg 12M
Lease Liab 1290T RR by SL. 3.4M 1360T (Not Recognized)
Int Exp 103200 *To record the Annual Rental RT to BL. 14.6M 5840T (Recognized)
Lease Liab. 396800 for the first year Total 18M 7.2M Total Gain
Cash 500T IE = (1290T X .08) Books of Seller - Lessee
Dep'n 516T *To record Annual Dep’n of Cash 20M *To record the Sale and
AccDep'n 516T RUA (1548T/3yrs) RUA 2040T Leaseback
Books of Buyer – Lessor Bldg 10.8M Sale = Cash and Bldg
Building 10M *To record purchase of Bldg LL 5.4M Leaseback = RUA, LL and
Cash. 10M Gain on Right Gain on RT
Cash 500T *To record the Annual Transferred 5840T
Rental Inc 500T Collection for the lease Int Exp 648T *To record the payment for
Dep'n 400T *To record Dep’n of Bldg LL. 852T the Annual Rental for 2020
AccDep'n 400T over UL (10M/25yrs) Cash. 1500T IE = (5.4M X .12)
Dep'n 408T *To record the Annual Dep’n
*Illustration – Sale Price above Fair Value AccDep'n. 408T of RUA over LT (2040T/5yrs)
Lessor sold a building with Remaining UL of 20yrs and leased Books of Buyer – Lessor
it back for 5 years. Sale Price = 20M; FV of bldg = 18M; =only 5 yrs or 25% of the 20 year life of the asset of the
Bldg-CA = 10.8M; Annual rent every 12/31 = 1.5M; IIR = 12% asset was leased, therefore the BL shall apply the Operating
6. Get the PV of LL or the RR by SL Lease model.
PV of Lease Liability = (1.5M X 3.60) = 5.4M = also, the PV of LL related to rentals is less than 90% of FV
IFRS 16, P.101: if Sale Price is NOT EQUAL to Fair Value, the Bldg. 18M *To record the purchase of
FinAsset 2M the bldg
 Cash 20M *FA = Financial Asset = RR by SL. 4591T 918,200 (Not Recognized)
Excess of Sale price over FV RT to BL. 1409T 281,800 (Recognized)
*The Seller-Lessor’s annual payment will be apportioned to: Total 6000T 1200T Total Gain
1. The Leased Asset – Building & Books of Seller - Lessee
2. The Financial Asset Cash 5000T *To record the Sale and
RUA 3672800 Leaseback
Bldg 4.8M Sale = Cash and Bldg
Rental Income 3.4M 944,444
LL 3591T Leaseback = RUA, LL and
Financial Asset 2M 555,556
Gain on Right Gain on RT
Lease Liability 5.4M 1,500,000
Transferred 281800
Int Exp 287280 *To record the payment for
*The FA will be amortized over the Lease Term LL. 612720 the Annual Rental for 2020
Cash 944,444 *To record the portion for Cash. 900T IE = (3591T X .08) *orig LL
Rent Income 944,444 the Leased Asset from the Dep'n 408T *To record the Annual Dep’n
Annual Collection AccDep'n. 408T of RUA over LT (3672800/5yrs)
*You can proceed with the Amortization table for Fin Asset. Books of Buyer – Lessor
You can also Journalize directly, just update the PV carefully =shall apply the Operating Lease model because lease term is
Cash 555,556 *To record the portion for only 62.5% of the UL of the asset, which is less than 75%
Fin Asset 315,556 FA from the collection =moreover, PV of LL of 4591T is less than 90% of FV of 6M
Int Income 240,000 Int Income = (2M X .12) *To record the purchase of
Dep’n 900T *To record the Annual Dep’n the Equipment
Equip't. 5M
AccDep’n 900T of Asset (18M/20yrs) *The Excess of FV only
Cash 5M
concerns the SL
*Illustration – Sale Price below Fair Value Cash 900T *To record the Annual Rental
Lessor sold an Equipment with remaining UL of 8 yrs and Rent Income 900T
leased it back for 5 yrs. Sale Price = 5M; FV of Equip't = 6M Dep'n 625T *To record the Annual Dep’n
Equip't-CA = 4.8M; Annual Rent every 12/31 = 900T; IIR = 8% AccDep'n. 625T of Equipt over its UL (5M/8yrs)
based on Sale Price
1. Get the PV of LL or the RR by SL
PV of Lease Liability = (900T X 3.99) = 3591T
*Note, always try to think of the Sale Price to equal the FV. Transfer of Asset is Not a Sale
So in this case, there is Excess Fair Value. IFRS 16, P. 103, provides that if the transfer of an asset by
*if the Sale price is Below Fair Value, the difference is the Seller-Lesser does not Satisfy the requirements for the
Accounted for As Prepayment of Rental. recognition of a Sale:
*So, in contrast with additional financing, the excess is added a.
to the Lease Liability. So, to put into amount the concept that
SP = FV = 6M, then the Excess FV would serves as an
additional liability by the SL to the BL.
2. Get the Excess Fair Value
FV of Equipt 6M
Sale Price 5M
Excess FV over Sale Price. 2M
3. Adjust the PV of Lease Liability
PV of LL 3591T
Prepayment of Rental 1000T (FA to BL)
Total Lease Liability 4591T (RR by SL)
4. Compute for the RUA

RR by SL 4591T 3672800 RUA

FV 6000T 4800T CA of UA
5. Compute for the Total Gain.
= in this case, the basis is the Fair Value

Fair Value 6M
Carrying Amount 4.8M
Total Gain. 1.2M
6. Compute for the RR by SL and RT to BL
Fair Value. 6M
RR by SL (Lease Liab) 4591T
RT to BL 1409T
7. Get the proportional Amount of the Gains that
pertain to the RR by SL and RT to BL from the
total gain.