(iv) On 1 April 2019, GHL entered into a sale and leaseback agreement for its manufacturing...

(iv) On 1 April 2019, GHL entered into a sale and leaseback agreement for its manufacturing plant. The plant was originally acquired by GHL on 31 March 2009 for $8,910,000, at which point the plant had a useful life of 30 years with no residual value. The sale proceeds of plant from the sale and leaseback agreement were $11.25 million, which is higher than the fair value of the plant of $9.0 million. The plant was leased back on a 20-year lease from 1 April 2019 at an annual rental of $1,105,350 to be paid annually in arrears at 31 March 2020. The sale satisfies HKFRS 15 “Revenue from Contracts with Customers”, however, she insisted to account for it as a financing arrangement. The first lease rental is paid and charged to the statement of profit or loss. The sales proceed was treated as a financial liability. The incremental borrowing rate is 15% per annum.

4) what is the requirement of a sale and leaseback transaction from the seller-lessee perspective in accordance with HKFRS 16?

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Expert Solution

HKFRS 16 states that the performance obligation shall be satisfied as per HKFRS 15 in order to determine whether the transfer of assets is to be accounted for as sale or not.

As it is mentioned that, the transaction do satiesfied the requirement stated in HKFRS 16 of the HKFRS 15, hence the seller lesse has to treat the transaction as sale.

Futher HKFRS 16 states only the carrying amount of the assets shall be transferred in terms of right to use. In this given case since the assets is left with useful life of 20 years, the gain shall be recognised for 20 years only.

As per HKFRS 16 if the sale is less or more than the fair market value then 2 crieterias shall be followed

1. Sale less than fair market value shall be accounted as prepayment of lease.

2. Sale more than fair market value shall be accouned as the financing provided by the Seller lesse.

in the given case the point 2 shall be followed.

The Point 1 and 2 shall be measured as follows as per HKFRS 16

The variation between the fair value of asset and fair value of consideration and variation between present value of lease payment at market rate and present value of contractual payment.

in this case the $1,105,350 is the annual contractual payment which shall be discounted at 15% along with fair market value to adjust the difference.

ekkarill92 answered 1 year ago

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