Sales & Leaseback Transactions

Sale and Leaseback Transactions

• If the transfer of an asset by the seller-lessee satisfies the requirements of IFRS15 to be accounted
for as a sale of the asset:
 The right-of-use asset shall be measured by the seller-lessee in the proportion of the
previously carrying amount of the leased asset that relates to the right-of-use retained by the
seller. Accordingly, the seller-lessee shall only recognize gain or loss relating to the right
transferred to the buyer to the buyer-lessor.
Or Computed lease liability
✓ ROU Asset = Carrying amount of Asset x Right Retained/Fair value of asset.
Right retained is equal to the present value of the lease payment (the lease liability)
- If SP > FV, right retained = PV of lease payments – additional financing
- If SP < FV, right retained = PV of lease payments + prepayments

✓ Total gain = Fair value – Carrying amount

• If Operating lease, recognized in full.
• If Finance lease:
− Gain to be recognized = Total Gain x Right transferred/Fair value of asset.
− Gain not to be recognized = Total Gain x Right Retained/Fair value of asset.
Note: ✓ If Selling Price > Fair Value of the underlying asset, the excess is accounted for as additional financing
and will be considered as a deduction adjustment to arrive at the Fair Value of the right retained.
✓ If the Selling Price < the Fair Value of the underlying asset, the excess is accounted for as prepayments
for lease payments and shall be accounted for as an addition adjustment to arrive at the Fair Value of
the right retained.

Illustration 17: On January 1, 2022, LEOPARD Company sold to CHEETAH Inc. its equipment with
carrying amount of P900,000 for P1,500,000. LEOPARD immediately leased back the equipment from
CHEETAH with an annual lease payment of P180,000 for 9 years with lease payment, payable at the end
of the of each year. On this date, the prevailing market rate of interest is 9%. The transaction constitutes
a sale in accordance with IFRS15.

Required: Determine the following on the books of Seller-lessee leaseback assuming the fair value of the
equipment is: (1) P1,500,000, (2) P1,350,000, and (3) P1,575,000.
1. Initial measurement of the lease liability1 4. Gain to be recognized
2. Cost of right-of-use asset 5. Gain not to be recognized
3. Total gain

Case 1: Summary
1. Initial measurement of lease liability 180,000 x 5.9952 = P1,079,136
2. Cost of right-of-use asset 1,079,136/1,500,000 x P900,000 = P647,482
3. Total gain P1,500,000 – 900,000 = P600,000
4. Gain to be recognized 420,864/1,500,000 x 600,000 = P168,346
5. Gain not to be recognized 1,079,136/1,500,000 x 600,000 = P431,654.4

Case 1: Selling price of P1,500,000 = Fair value of P1,500,000

Selling Price P1,500,000 Fair value P1,500,000
Less: Fair Value P1,500,000 Less: Carrying amount 900,000
Additional financing (prepayments) - Total Gain P600,000

SUBJECT: ACCO20103 INTERMEDIATE ACCOUNTING 3 1

PREPARED BY: RODISON E. DE GUIA, CPA
Annual lease payment P180,000
PV of an ordinary annuity, @9%, n=9 5.9952
Total present value P1,079,136

Carrying amount Gain (Loss)

Fair Value Fraction or Percent (Fraction x CV of leased asset) (FV – CV)
b
Rights retained P1,079,136 1,079,136/1,500,000 P647,482 P431,654
a C
Rights transferred 420,864 420,864/1,500,000 252,518 168,346
Total P1,500,000 P900,000 P600,000
a
FV of rights transferred = P1,500,000 (Total Fair value) minus P1,079,136 (FV of rights retained) = P420,864
b
CV of rights retained (1,079,136/1,500,000 x P900,000) = P1647,482
C
CV of rights transferred (420,864/1,500,000 x P900,000) = P252,518

FV of rights transferred P420,864

Less: CV of rights transferred 252,518
Gain (loss) on Leaseback P168,346 or

CV of rights transferred x Total gain = P841, 728 x P1, 500, 000 = P168,346
FV of Underlying Asset P1,500,000

The journal entry on the part of LEOPARD Company (seller-lessee)

1/1/2022 Cash 1,500,000
Right-of-Use Asset 647,482
Equipment 900,000
Lease Liability 1,079,136
Gain on rights transferred 168,346
12/31/2022 Interest expense (1,079,136 x 9%) 97,122
Lease Liability (180,000 – 97,122) 82,878
Cash 180,000

The journal entry on the part of CHEETAH Inc. (buyer-lessor), assuming it is a finance lease.
1/1/2022 Equipment (at fair value) 1,500,000
Cash 1,500,000
Lease Receivable (180,000 x 9) 1,620,000
Equipment 1,500,000
Unearned interest income (1,620, 000 – 1,500,000) 120,000
12/31/2022 Cash 180,000
Lease Receivable 180,000
Note: The recognition of interest income shall be based on the implicit rate of the lease computed using
interpolation based on the fair value of the asset.

The journal entry on the part of CHEETAH Inc. (buyer-lessor), assuming it is an operating lease.
1/1/2022 Equipment (at fair value) P1,500,000
Cash 1,500,000
12/31/2022 Cash 180,000
Rent Income 180,000

Case 2: Summary
1. Initial measurement of lease liability (180,000 x 5.9952) – 150,000 = P929,136
2. Cost of the right-of-use asset 929,136/1,350,000 x P900,000 = P619,424

SUBJECT: ACCO20103 INTERMEDIATE ACCOUNTING 3 2

PREPARED BY: RODISON E. DE GUIA, CPA
3. Total gain P1,350,000 – 900,000 = P450,000
4. Gain to be recognized 420,864/1,350,000 x P450,000 = P140,288
5. Gain not to be recognized 929,136/1,350,000 x P450,000 = P309,712

Case 2: Selling price of P1,500,000 M > Fair value of P1,350,000

Selling Price P1,500,000 Fair value P1,350,000
Less: Fair Value 1,350,000 Less: Carrying amount 900,000
Additional financing P150,000 Total Gain P450,000

Selling Price > Fair Value of the underlying asset, the excess is accounted for as additional financing (deduction
adjustment to arrive at the Fair Value of the right retained).
Annual lease payment P180,000 Present value of lease payment P1,079,136
PV of ordinary annuity, @9%, n=9 5.9952 Additional financing (150,000)
Total PV of lease payment P1,079,136 FV of rights retained P929,136

Carrying amount Gain (Loss)

Fair Value Fraction or Percent (Fraction x CV of leased asset) (FV – CV)
b
Rights retained P929,136 929,136/1,350,000 P619,424 P309,712
a C
Rights transferred 420,864 420,864/1,350,000 280,576 140,288
Total P1,350,000 P900, 000 P450,000
a
FV of rights transferred = P1,350,000 (Total Fair value) minus P929,136 (FV of rights retained) = P420,864
b
CV of rights retained (929,136/1,350,000 x P900,000) = P619,424
C
CV of rights transferred (420,864/1,350,000 x P900,000) = P280,576

FV of rights transferred P420,864

Less: CV of rights transferred 280,576
Gain (loss) on Leaseback P140,288 or

CV of rights transferred x Total gain = P420,864 x P450,000 = P140,288

FV of Underlying Asset P1,350,000

The journal entry on the part of LEOPARD Company (seller-lessee)

1/1/2022 Cash 1,500,000
Right-of-Use Asset 619,424
Equipment 900,000
Lease Liability 929,136
Loan Payable 150,000
Gain on rights transferred 140,288
12/31/2022 Interest expense (1,079,136 x 9%) 97,122
Lease Liability (180,000 – 97,122) 82,878
Cash 180,000

The annual lease payment of P180,000 is split between the lease liability and loan payable as follows:
Balances Proportion Allocated amount
Lease liability P929,136 929,136/1,079,136 x P180,000 = P154,980
Loan Payable 150,000 150,000/1,079,136 x P180,000 = 25,020
Total P1,079,136 P180,000

SUBJECT: ACCO20103 INTERMEDIATE ACCOUNTING 3 3

PREPARED BY: RODISON E. DE GUIA, CPA
 The journal entry on the part of CHEETAH Inc. (buyer-lessor), assuming it is a finance lease.
1/1/2022 Equipment (at fair value) 1,350,000
Financial Asset (Loan Receivable) 150,000
Cash 1,500,000
Lease Receivable (180,000 x 9) 1,620,000
Equipment 1,500,000
Unearned interest income (1,620, 000 – 1,500,000) 120,000
12/31/2022 Cash 180,000
Lease Receivable 180,000
Note: The recognition of interest income shall be based on the implicit rate of the lease computed using
interpolation based on the fair value of the asset.

The journal entry on the part of CHEETAH Inc. (buyer-lessor), assuming it is an operating lease.
1/1/2022 Equipment (at fair value) 1,350,000
Financial Asset 150,000
Cash 1,500,000
12/31/2022 Cash 180,000
Rent Income (180,000 x 929,136/1,079,136) 154,980
Financial Asset (180,000 x 150,00/1,079,136) 25,020

Case 3: Summary
1. Initial measurement of lease liability 180,000 x 5.9952 = P1,079,136
2. Cost of right-of-use asset 1,154,136/1,575,000 x P900,000 = P659,506
3. Total gain P1,575,000 – 900,000 = 675,000
4. Gain to be recognized 420,864/1,575,000 x P675,000 = P180,370
5. Gain not to be recognized 1,154,136/1,575,000 x P675,000 = P494,630

Case 3: Selling price of P1,500,000 < Fair value of P1,575,000

Selling Price P1,500,000 Fair value P1,575,000
Less: Fair Value 1,575,000 Less: Carrying amount 900,000
Prepayments P75,000 Total Gain P675,000

If Selling Price < Fair Value of the underlying asset, the excess is accounted for as prepayments for lease payments
and shall be accounted for as an addition adjustment to arrive at the Fair Value of the right retained.

Annual lease payment P180,000 Present value of lease payment P1,079,136

PV of ordinary annuity, @9%, n=9 5.9952 Prepayments 75,000
Total PV of lease payment P1,079,136 FV of rights retained P1,154,136

Carrying amount Gain (Loss)

Fair Value Fraction or Percent (Fraction x CV of leased (FV – CV)
asset)
b
Rights retained P1,154,136 1,154,136/1,575,000 P659,506 P494,630
a C
Rights transferred 420,864 420,864/1,575,000 240,494 180,370
Total P1,575,000 P900,000 P675,000
a
FV of rights transferred = P1,575,000 (Total Fair value) minus P1,154,136 (FV of rights retained) = P420,864

SUBJECT: ACCO20103 INTERMEDIATE ACCOUNTING 3 4

PREPARED BY: RODISON E. DE GUIA, CPA
b
CV of rights retained (1,154,136/1,575,000 x P900,000) = P659,506
C
CV of rights transferred (420,864/1,575,000 x P900,000) = P240,494

FV of rights transferred P1,154,136

Less: CV of rights transferred 659,506
Gain (loss) on Leaseback P494,630 or

CV of rights transferred x Total gain = P420,864 x P675,000= P180,370

FV of Underlying Asset P1,575,000

The journal entry on the part of LEOPARD Company (seller-lessee)

1/1/2021 Cash 1,500,000
Right-of-Use Asset 659,506 -75,000
Prepaid asset
Equipment 75,000 900,000
Lease Liability 1,079,136
Gain on rights transferred 180,370
12/31/2022 Interest expense (1,079,136 x 9%) 97,122
Lease Liability (180,000 – 97,122) 82,878
Cash 180,000

The journal entry on the part of CHEETAH Inc. (buyer-lessor), assuming it is a finance lease.
1/1/2021 Equipment (at fair value) P1,575,000
Cash 1,500,000
Unearned rent income 75,000
Lease Receivable (180,000 x 9) 1,620,000
Equipment 1,500,000
Unearned interest income (1,620, 000 – 1,500,000) 120,000
12/31/2021 Cash 180,000
Lease Receivable 180,000
Note: The recognition of interest income shall be based on the implicit rate of the lease computed using
interpolation based on the fair value of the asset.

The journal entry on the part of BACOLOD Company (buyer-lessor), assuming it is an operating lease.
1/1/2021 Equipment (at fair value) P1,575,000
Cash 1,500,000
Unearned rent income 75,000
12/31/2021 Cash 180,000
Rent Income 180,000
Unearned rent income 4,874
Rent income (75,000 x 75,000/1,154,136 4,874

SUBJECT: ACCO20103 INTERMEDIATE ACCOUNTING 3 5

PREPARED BY: RODISON E. DE GUIA, CPA