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Sale and lease back under finance lease
07-20-2009, 01:38 AM,
Sale and lease back under finance lease

An asset with carrying value of Rs. 300,000 was sold for Rs. 400,000 and then lease back at Rs. 500,000 udner the finance lease for a period of 3 years.. Would any body please tell me the accouting entries.

Thank you
07-21-2009, 05:10 AM,
The following have been calculated based on given data, detail being omitted, assumptions,where taken, being shown against each.
IRR is 25%
Assuming PV of asset Rs. 500,000, as given
Minimum lease payments are 614,754
Annual rental payment (assuming in advance)Rs. 204,918

In the books of Lessee, Entries for the first year.
<b>At the time of sale</b>
Cash -----------------------------400000Debit
Surplus on revaluation------------100000Credit
Assuming application of section 235 of Company ordinance 1984.

<b>Asset acquired on finance lease</b>
Asset under finance lease---------500,000Debit
Liablity Under finance lease------500,000Credit

<b>First lease payment</b>
Liablity under finance lease------204918Debit

<b>At the end of the year</b>
Interest Expense------------------73770Debit
Interest Payable------------------73770Credit

<b>second Annual rental payment</b>
Interest payable------------------73770Debit
Liablity under finance lease------131148Debit

These entries have been made from lessee's perspective, Depreciation entry is also required to be made forthwith other entry at the end of the year.In my opinion, from the lessor's perspective entries will not be difficult for you.

Best Regards,
07-21-2009, 08:39 PM,

no i asked the question with reference to Para 59 of IAS-17 WHICH says

if a sale and leaseback transaction results in finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognised as income,instead it shall be deferred and amoritised over the lease term.

what will be the amount of deferred income in the above case.
07-22-2009, 04:57 PM,
Had you mentioned that the respond should be in accordance with IAS 17 then no assumption would have been taken by me.

With regards to the compliance of IAS 17,
Credit unearned finance income of Rs. 100,000 instead of crediting Surplus on revaluation, furthermore, at the end of each of the three years, pass the following entry;

Unearned Finance Income --------------33,333Debit
Profit of sale and lease back --------33,333Credit

Pass the aforesaid entry at the end of each of the three years to amortised the unearned income in full.

Best Regards,
07-22-2009, 07:00 PM,

If the the sale of asset at Rs. 400,000/- and lease back at Rs. 500,000/- are irrelated transactions in their substance and have not taken place simultaneously with an outright intent of leasing it back then there could be some argument of booking Rs 100,000 as gain on sale immediately and deferring the remaining Rs. 100,000 over the lease term.

However, it appears that the intent of transaction was outrightly to lease it back, therefore, it makes a financing arrangement instead of genuine sales transaction in its essense. The people can distort their financial results through such structured transactions and affect their reported profits through window dressing which has to be addressed by IASs/IFRSs for fair presentation.

Accordingly, in my confirmed view, the entire Rs. 200,000 will be deferred and amortized over the lease term. There should be no two opinions. If there are in some one's view, he should analyze how the financials could be window dressed by such structured arrangements. IFRSs cannot allow misrepresentations.

Section 235 of CO84 can by NO MEANS be invoked in the transaction described by the query irrespective of whatever assumptions are taken. I think there is no need to go in details for proving the point. A simple reading of section 235 will make it clear. Further, finance lease transcations have to be accounted for under IAS-17 and there is no need to specify it while raising any query. Contrary to it could be no assumption at all.

I could not help replying this query, so please no offense should be taken by any one. I acknowledge all the good work done by Faisal.



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