Accounting for Sale and Leaseback Transactions
A Company (“a Seller”) sells manufacturing machinery with a 5 year remaining economic life to a financial institution (“a buyer”) and the Company simultaneously leases it back from the buyer. The use of the machinery is generally continued by the Company.
Keywords: Mazars, Thailand, Accounting, Thai Accounting Standards, TAS, Sale and Leaseback
12 May 2015
The conditions of the lease and details of the carrying amount and fair value are as follows:
i. Initial term of the lease is 5 years, non-cancellable and requires equal rental payments of Baht 492,000 of each year.
ii. The fair value of this machinery is Baht 2.5 million and the estimated useful life is 5 years.
iii. The Company has an option to purchase the machinery at the price equal to the residual value at Baht 500,000 (20% of property cost).
iv. Carrying amount and selling price are as follows:
Unit: Thai Baht | ||
Selling price / fair value Carrying amount (net book value) | 2,500,000 | |
Cost of manufacturing machinery | 2,450,000 | |
Less accumulated | (155,000) | (2,295,000) |
Unearned profit on sale and leaseback | 205,000 |
How should the Company record the sale and leaseback transactions in its financial statements?
The lease as mentioned above is a finance lease mainly due to:
i. The lease term is equal to the estimated useful life of the machinery (refer to TAS 17 paragraph 10.3).
ii. The present value of the minimum lease payment amounts to at least substantially all of the fair value of the machinery of the leased assets (refer to TAS 17 paragraph 10.4).
Furthermore, according to TAS 17m paragraph 58 and 59 indicates that:
i. Sale and leaseback transactions involve the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved.
ii. If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognised as income by a seller-lessee. Instead, it shall be deferred and amortised over the lease term.
As a result, the Company should record the sale and leaseback transactions as follows:
Debit | Credit | ||||
At the date of the transaction | |||||
Dr. | Cash at bank | 2,500,000 | |||
Dr. | Accumulated depreciation – machinery | 155,000 | |||
| Cr. | Machinery | 2,450,000 | ||
| Cr. | Unearned profit on sales and leaseback | 205,000 | ||
Recording sale and leaseback of machinery | |||||
Dr. | Leased machinery (new price) | 2,500,000 | |||
| Cr. | Finance lease liabilities | 2,500,000 | ||
Recording finance lease liabilities | |||||
At the end of the year | |||||
Dr. | Finance lease liabilities | 492,000 | |||
| Cr. | Cash at bank | 492,000 | ||
Record payment of financial lease | |||||
Dr. | Depreciation - machinery | 500,000 | |||
| Cr. | Accumulated depreciation - machinery | 500,000 | ||
Record the depreciation of machinery (THB 2,500,000 / 5 years) | |||||
Dr. | Unearned profit on sales and leaseback | 41,000 | |||
| Cr. | Depreciation - machinery | 41,000 | ||
Record the amortization of the deferred surplus on the sale and lease back (THB 205,000 / 5 years) | |||||
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