Definition

A sale and leaseback is an arrangement

whereby one party sells an asset to
another party and then immediately leases
the asset back from the new owner.
Seller becomes a seller-lessee
Buyer becomes a buyer-lessor
 Illustration: Sales price at FV
On January 1, 2017, an entity sold an equipment with
remaining life of 10 years and immediately leased it back for 4
years at the prevailing market rental.
Sale price at fair value 6,000,000
Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
PVOA 1 at 10% for four periods 3.170

Compute for:
a. Lease liability
b. Right of use asset
c. Gain or loss to be recognized
 Lease Liability
Present value of rentals
(800,000 x 3.17) 2,536,000
 Right of use asset
Sale price at fair value 6,000,000
Carrying amount of equipment 4,500,000

Cost of Right of use asset = PV of LL / FV x CA

Cost of Right of use asset

(2,536,000 / 6,000,000 x 4,500,000) 1,902,000
 Gain or loss to be recognized
Gain or loss that pertain to the right retained by the seller-
lessee is not recognized.
Gain or loss that pertains to the right transferred to the buyer-
lessor is recognized.
Total gain = FV-CA (6M-4.5M) 1,500,000

Fair Value 6,000,000

Right retained by seller-lessee equal to LL 2,536,000
Right transferred to buyer-lessor 3,464,000

Gain to be recognized (3,464K / 6M x 1.5M) 866,000

Gain not to be recognized (2,536K / 6M x 1.5M) 634,000
Total gain 1,500,000
 Illustration: Sales price above FV
On January 1, 2017, an entity sold a building with remaining life
of 20 years and immediately leased it back for 5 years at the
prevailing market rental.
Sale price 20,000,000
FV of Building 18,000,000
Carrying amount of building 10,000,000
Annual rental payable at the end of each year 1,500,000
Implicit interest rate 6%
PVOA 1 at 10% for four periods 4.212
Compute for:
a. Lease liability
b. Right of use asset
c. Gain or loss to be recognized
 Lease Liability
Present value of rentals
(1,500,000 x 4.212) 6,318,000
 Right of use asset
Sale price 20,000,000
Fair value of building 18,000,000
Excess sale price over fair value 2,000,000

PV of rentals 6,318,000
Additional financing equal to excess FV (2,000,000)
PV related to lease liability 4,318,000

Cost of Right of use asset = PV of LL / FV x CA

Cost of Right of use asset

(4,318,000 / 18,000,000 x 10,000,000) 2,398,889
 Gain or loss to be recognized
Total gain = FV-CA (18M-10M) 8,000,000

Fair Value 18,000,000

Right retained by seller-lessee equal to LL 4,318,000
Right transferred to buyer-lessor 13,682,000

Gain to be recognized (13,682K / 18M x 8M) 6,080,889

Gain not to be recognized (4,318K/18Mx8M) 1,919,111
Total gain 8,000,000
 Allocation of the annual rental (Buyer-Lessor)

Present Value Fraction Allocation

Rental income 4,318,000 4,318 / 6,318 1,025,166
Financial asset 2,000,000 2,000 / 6,318 474,834
Total PV 6,318,000 1,500,000
 Illustration: Sales price below FV
On January 1, 2017, an entity sold an equipment with
remaining life of 8 years and immediately leased it back for 5
years.
Sale price 5,000,000
FV of Equipment 5,500,000
Carrying amount of equipment 4,000,000
Annual rental payable at the end of each year 900,000
Implicit interest rate 8%
PVOA 1 at 8% for five periods 3.993
Compute for:
a. Lease liability
b. Right of use asset
c. Gain or loss to be recognized
 Lease Liability
Present value of rentals
(900,000 x 3.993) 3,593,700
 Right of use asset
Fair value of building 5,500,000
Sale price 5,000,000
Excess sale price over fair value 500,000

PV of rentals 3,593,700
Additional financing equal to excess FV 500,000
PV related to lease liability 4,093,700

Cost of Right of use asset = PV of LL / FV x CA

Cost of Right of use asset

(4,093,700 / 5,500,000 x 4,000,000) 2,977,236
 Gain or loss to be recognized
Total gain = FV-CA (5.5M-4M) 1,500,000

Fair Value 5,500,000

Right retained by seller-lessee equal to LL 4,093,700
Right transferred to buyer-lessor 1,406,300

Gain to be recognized (1,406.3K/5.5M x1.5M) 383,536

Gain not to be recognized (4,093.7K/5.5Mx1.5M) 1,116,464
Total gain 1,500,000
 Illustration: Sales price at FV with loss
On January 1, 2017, an entity sold a Building with remaining
life of 25 years and immediately leased it back for 3 years.
Sale price at FV 10,000,000
Carrying amount of equipment 12,000,000
Annual rental payable at the end of each year 500,000
Implicit interest rate 8%
PVOA 1 at 8% for three periods 2.577
Compute for:
a. Lease liability
b. Right of use asset
c. Gain or loss to be recognized
 Lease Liability

Present value of rentals

(500,000 x 2.577) 1,288,500
 Right of use asset
Carrying amount 12,000,000
Sale price at fair value 10,000,000

Cost of Right of use asset = PV of LL / FV x CA

Cost of Right of use asset

(1,288,500 / 10,000,000 x 12,000,000) 1,546,200
 Gain or loss to be recognized
Total loss = FV-CA (10M-12M) 2,000,000

Fair Value 10,000,000

Right retained by seller-lessee equal to LL 1,228,500
Right transferred to buyer-lessor 8,771,500

Loss to be recognized (8,771.5K/10M x2M) 1,742,300

Loss not to be recognized (1,228.5K/10Mx2M) 257,700
Total gain 2,000,000