Accounting Treatment of Sale and Leaseback Transactions - AS 9 - Tax Addicters

 

Sale and Leaseback Accounting as per AS 9

Most of the students are getting confused about the accounting treatment of sale and leaseback transactions as per Accounting Standard 9 ( formally called as AS 9 / Ind AS 116). Here we are going to explain the accounting treatment of profit or loss in case of Sale and Leaseback transactions in a simple and logical manner and at the end of the topic, there is an example for remembering the concept. We are also providing the concept in flow chart in a downloadable pdf. 

Page Contents

• Meaning of Sale and Leaseback Transactions
• Types of Leases
• Definitions of lease types
• Accounting Treatment of Profit or Loss in case of Sale & Leaseback

1. In case of Finance Lease
2. In case of Operating Lease

• Important Additional points
• Simple Example for understanding
• Downloading option for flow chart in pdf 

Meaning of Sale and Lease Back

• The Basis of a sale and lease back agreement is simply that one sells asset for cash and leases it back from the buyer. 
• The lessee or seller receives the cash immediately and makes the periodic payments in the form of lease rents for right to use in the property.
• The lease payments and and the sale price are generally interdependent. 
• The accounting treatment of the sale and lease back depends upon the type of the lease involved.

Types of Leases

There are two types of leases , they are :

1. Finance Leases  and
2. Operating Leases

Definitions of Lease types:

1) Financing Lease : 

A lease is classified as Finance lease if ,

1. It Transfer substantially all the risks and rewards incident to ownership of an asset
2. Title may or may not be eventually transferred

2) Operating Lease

A Lease is classified as Operating Lease if

1. It does not transfer substantially all the risks and rewards incident to ownership

Accounting Treatment of Profit or Loss on Sale of an Asset:

a) In case of Finance Lease :

The resulting profit or loss on sale of an asset in case of Finance lease will be differed or amortized  over the lease term in proportion to Depreciation.

b) In case of Operating Lease

• The resulting profit or loss on sale of an asset in case of Operating lease, we should compare  both the sales price and Fair Value.
•  The Accounting treatment in case will resulted in three cases:

Case 1 : Sales Price = Fair Value

• Then the resultant Profit or Loss will be Recognized immediately.

Case 2 : Sales Price > Fair Value 

• Then the resultant Profit or Loss will be Recognized immediately.
• If the loss is compensated by future lease payments, it should be deferred and amortized in proportion to lease payments over the usage  period

Case 3 : Sales Price < Fair Value

• The resultant Profit or Loss will be deferred and Amortized over the period for which the asset is expected to be used.

Pay attention on Additional Points while doing the accounting treatment of Sale and Lease Back transactions :

Here we are going to compare Carrying amount (CA), sales Price (SP) and Fair Value (FV) for the purpose of accounting treatment of Profit or Loss in sale and Lease Back transactions.

There are three situations which are as follows :

Situation 1 :  FV > CA > SP 

• The resulting loss i.e difference between CA and SP - recognized immediately provided loss is not compensated by future lease payments

 

Situation 2 : SP > FV> CA

• The resulting Profit i.e difference between FV and CA - recognized immediately.
• The sale consideration (SP) in excess of  carrying Amount (CA) resulting Profit will be recognized immediately.

Situation 3 : CA > SP >FV

The resulting loss i.e Difference between CA and FV will be recognized immediately.

• The sale consideration (SP) in excess of  Fair Value (FV) resulting Profit will be differed or amortized over the  lease period.

Also Read : Income Tax Slab Rates  for the FY 2019-20 (AY 2020-21) and FY 2020-21 (AY 2021-21) both old and new regime .

Example for Simple Understanding :

Illustration : TA Ltd. sold machinery having WDV of Rs. 40 lakhs to PVK Ltd for Rs. 50 lakhs and the same machinery was leased back by PVK Ltd to TA Ltd. The lease back is operating lease. Comment if :

i) SP of Rs.50 lakhs is equal to FV

ii) FV is Rs.60 lakhs

iii)FV is Rs.45 lakhs and SP is Rs.38 lakhs

iv)FV is Rs.40 lakhs and SP is Rs.50 lakhs

v)FV is Rs.46 lakhs and SP is Rs.50 lakhs

vi)FV is Rs.35 lakhs and SP is Rs.39 lakhs

Solution :

Following will be the treatment in given cases

i) When SP of Rs.50 lakhs is equal to FV , TA Ltd. should immediately recognise the profit of Rs.10 lakhs (i.e 50-40 ) in its books.

ii) When SP of Rs.60 lakhs then  also profit of Rs.10 lakhs should be immediately recognized by TA Ltd.

iii) When FV of leased machinery is  Rs.45 lakhs and SP is Rs.38 lakhs then loss of Rs.2 lakhs (i.e 40-38) to be immediately recognized by TA Ltd in its books provided loss is not compensated by future lease payments.

 

iv)When FV is  Rs.40 lakhs and SP is Rs.50 lakhs then profit of Rs.10 lakhs (i.e 50-40) is to be  deferred and amortized  over the lease periods.

v)  When FV is  Rs.46 lakhs and SP is Rs.50 lakhs then Profit of Rs.6 lakhs (i.e 46-46) to be immediately recognized by TA Ltd in its books and balance profit of Rs.4 lakhs (i.e 50 - 46) is to be amortized or deferred over lease period.

vi) When FV is  Rs.35 lakhs and SP is Rs.39 lakhs then loss of Rs.5 lakhs (i.e 40-35) to be immediately recognized by TA Ltd in its books and profit of Rs.4 lakhs (i.e 39 - 35) is to be amortized or deferred over lease period.

Download the Accounting Treatment for Profit or Loss of Sale and Leaseback transactions in flow charts :

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