IFRS16 - intermediate lessor - prepayments received

[noobIFRSnoob]

Hi,

The company has a head lease as a 10 year contract with a gross value of 2 mil eur. Company is using incremental borrowing rate that is 5%. So there has been a ROU asset and lease liaiblity recorded approximately in amount of 1.6 mil eur.
Company enters into a sublease contract for a non-cancellable lease of 10 years, where it rents out the same equipment for the lessee. The gross value is 2.5 mil eur and the lessee will be prepaying 2 mil eur. The rest of the amount is to be paid monthly for the 10 year period.
It has been concluded that the sublease is a finance lease and the company should derecognize the headlease ROU asset. But should in this case the net investment be calculated with 500 thousand being discounted and the 2 mil added as prepayment? This would generate a problem where the company would end up recognizing around 700 thousand as profit initially and then for the rest of the period the net interest would be negative and generate around 300 thousand loss in the 9 years to come. Or should the interest income and initial revenue recognition be measured differently than that?

I tried to find examples online, but there were none. Since it seems like it is not a very common deal. Anyway, I would be really greatful if someone more experienced can share their insight

[Ketan Marwah]

Hi,

What do you find strange here? On one hand you have a debt of USD 1.6m and on the other hand you have a receivable of USD 0.5m so you are bound to have a net interest expense on the PnL (don't read it as that those two items could be netted). It is a very common scenario so in my view nothing unusual here.