A Company has leased land for 20 years from the Govt on which it pays lease rentals, and has accounted for this as ROUA and Lease liab as per IFRS 16.
The NBV of the ROUA on the date of the SALT is $15m, while the corresponding Lease liab stands at $16m on the same date.
The company has constructed a building on this leasehold land, which stands in its balance sheet at an NBV of $12m of the date of the SALT.
On 1 Sep 2020, this Company sells the building to a related party for $55m (and incurs transaction costs of $3m). As per a valuation done close to the date of the SALT, the fair value of the property is indeed $55m. The land lease from the Govt is also transferred in the name of the related party. It is not a new lease.
So now the building stands in the books of the related party. And the related party has to pay the land lease rentals to the Govt, for the remainder of the lease term.
On the same day, the related party leases the building back to the Company. The present value of the building lease rentals is $42m. And the related party also sub-leases the land lease to the Company. The PV of the land lease rentals is $12m. So the total PV of the bldg + land lease is $54m (42+12).
Under IFRS 16 sale & leaseback rules, we need to calculate the proportion of the asset retained and the proportion disposed off. My thinking was as follows:
the entire package of leased land + building on top of it is transferred to the related party for a consideration of 52m (55-3).
The NBV of this entire package in the Company's books is 12m (Building) + 15m (ROUA on Land lease) - 16m (related Lease liab) = 11m
PV of the lease rentals to be paid by the Company to the related party for the leaseback = 54m
Proportion of the SALT asset retained = 54m (PV of lease rentals for the leaseback) /52m (net sale proceeds) = 104%
Since we cannot "retain" more than the NBV of the asset, this retained portion is limited to 100%, ie. 11m
Does this make sense ?
Since the PV of lease rentals being paid back to buyer-lessor is 54m, while the sale proceeds received from buyer-lessor are 52m, the amount of sale proceeds relating to the part "disposed off" is 0, and the sale proceeds relating to the part "retained" are 52m.
Does this make sense ?
If the above are correct, then would the accounting in the seller-lessee books look like this ?
Bank Dr. 52m
ROUA "retained" Dr. 11m
LL Cr. 54m
NBV of building transferred Cr. 12m
NBV of ROUA on the land lease transferred Cr. 15m
Lease liab relating to the above extinguished Dr. 16m
Loss on SALT Dr. 2m (balancing figure)
All topics related to IFRS Standards.
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