Sale and leaseback transaction question

[noobIFRSnoob]

Hi,

Company A is renting out equipment to clients that is recognized as fixed assets and is depreciated over the 2 years. Now due to some reasons company A has decided that this rented out equipment is not preferable to keep in the fixed assets and has received an offer from financial institution to sell the equipment and lease it from them with an operational lease. Basically the institution is offering to buy all of the new rented equipment each month and after that each month the lease payment is adjusted according to the new value that the equipment is holding. The rental period for each bundle is 2 years and there is some interest % that is payed on top of it. At the end of the period the equipment belongs to the lessee. So it would be pretty much in formality that the equipment is sold to the institution, but in reality everything is still handled by Company A. Does this still somehow qualify as sale or is it looking more like the Company A is still holding the control of the asset? And in what case it would fall under the category that it would be obtaining a right to control the asset?

So in conclusion company A is looking for a way to qualify the assets as a lease from the institution and recognize them with IFRS16. I would really appreciate if anyone could suggest any ideas on this matter.

[Marek Muc]

Company A should determine whether the transfer of the equipment would classify a a sale under IFRS 15

https://ifrscommunity.com/knowledge-bas ... nsactions/

https://ifrscommunity.com/knowledge-bas ... nt-in-time

[noobIFRSnoob]

Thank you, Marek. Do you think my understanding is correct, that since probably the Company A does not control the asset while its buying it from company B and immediately selling to finance institution, it would mean its a regular lease? Basically because Company A at the purchase of the goods does not hold any control yet, because they do not physically possess the goods and cant direct their use yet. Also probably the risks are not yet transferred to them.



I found the following from your link:
It is sometimes the case that an entity purchases an asset from a manufacturer or a dealer (e.g. because it has significant trade discounts), and then the asset is immediately sold to a lessor and leased back by the entity that originally purchased the asset from a manufacturer/dealer. The legal form of such a transaction does not determine the accounting treatment. If the seller-lessee did not control the asset before it was transferred to the lessor, the whole transaction is not accounted for a sale and leaseback, but as a regular lease (IFRS 16.B45-B47).

The assessment of whether an entity controlled the asset before it was transferred to a lessor can be made based on paragraph IFRS 15.33. Usually, in transactions structured as described above, the entity buying the asset from a manufacturer or a dealer does not control the asset and such a transaction is accounted for as a regular lease.

[Marek Muc]

yes, it seems that is the case here!