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)

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)