IFRS 16 Sale and Leaseback - Subsequent journals

[novicepq]

Hi,
This is concerning transaction price less than the market price of an asset. Here is the scenario with related information:

the fair value of the asset is $90,000, the sales proceed is 85,000, the carrying amount is $80,000, the lease term is 10 years, with annual rental payment of $12,000, and the implicit interest rate is 10% (10Y annuity factor 6.145). Assuming the sale satisfy the performance obligation.

The initial journals look something like below:
Dr Bank 85,000
Dr Prepayment 5,000 (90,000-85,000)
Dr ROU asset 65,547 (73,740/90,000*80,000)
Cr PPE 80,000
Cr Lease liability 73,740 (12,000*6.145)
Cr SPL (bal. figure) 1,807

Can you help me understand how is the prepayment and lease liability are amortised over the 10 years with journal entry? YouTube lecture videos say that the amortisation of the prepayment will reduce the lease payment. But isn't the lease payment of $12,000 stipulated in the original contract?

Thank you.

[Ketan Marwah]

Hi Novice,

You might have to relook at your journal. Basis my understanding of IFRS 16.101(a), the correct journal would be the following:

Bank DEBIT 85000
ROU DEBIT 68740 (73740-5000 off market element)

PPE CREDIT 80000
LL CREDIT 73740

I would not book any gain/loss in the scenario where sale consideration < fair value.

[Marek Muc]

The fair value is higher than the carrying amount, so there is a gain on disposal, part of which (relating to the rights transferred to the buyer-lessor) should be recognised in P/L. IFRS 16 assumes that the lower sales price will be compensated by lower lease payments, hence it makes sense to recognise the gain on sale.

As for the prepayment, I'd just factor it into the lease liability (i.e. reduce it), instead of treating it as a separate asset.

[Ketan Marwah]

Hi Marek, while your explanation does make sense however have you found any illustrative example in any of the big 4 publication wherein this specific line of thinking is discussed.
From whatever I have seen so far, comparison is made between Sale consideration and Fair value alone and the delta is then adjusted onto ROU/LL in case where Fair value > Sale consideration.
Having said this, I would also admit that I haven’t seen a case where carrying amount < Sale consideration < Fair value.

[Marek Muc]

I haven't looked into this through BIG 4 publications, but I think IFRS 16.100-102 is quite clear on this matter.