Sale and lease back

In this lesson

1. 0:00 Sale and leaseback transactions explained
2. 0:15 Why companies use sale and leaseback arrangements
3. 0:29 IFRS 15 criteria for genuine sales
4. 1:02 Accounting treatment when sale criteria met
5. 1:45 Calculating the right of use asset
6. 3:20 Non-qualifying sales treatment
7. 3:56 Cooper Co worked example
8. 6:26 Key calculation recap and balancing figures

About this lesson

You'll discover how to determine whether the transfer qualifies as a genuine sale, and if it does, how to remove the original asset from your financial statements whilst recognising a right of use asset based on the proportion of the asset you're economically retaining. The key technique centres on calculating the right of use asset value. When a sale and leaseback meets the IFRS 15 criteria, you'll remove the asset's carrying amount and record a gain or loss on disposal. Crucially, the right of use asset is measured as the carrying amount multiplied by the fair value of the lease liability divided by the sales proceeds. This reflects the economic reality: you've sold part of the asset's value but retained control over most of it through the lease agreement. You'll work through a practical example using Cooper Co, which sells a machine for £720,000 and leases it back for three years. The walkthrough shows how to calculate the right of use asset (£550,000 in this case) and how to record the double entry, with the profit on disposal emerging as the balancing figure. Understanding this treatment is essential for Financial Reporting and Advanced Financial Reporting papers, where sale and leaseback questions test your grasp of both disposal accounting and lease recognition under current standards.

Duration: 8m