Example 2 The seller/lessee sells a building to the buyer/lessor for $800,000 cash. The carrying amount of the building prior to the sale was $600,000. The seller/lessee arranges to lease the building back for five years at $120,000 per annum, payable in arrears. The remaining useful life is 15 years. The transaction satisfies the performance obligations in IFRS 15, so will be accounted for as a sale and leaseback.At the date of sale the fair value of the building was $750,000, so the excess $50,000 paid by the buyer is recognised as additional financing provided by the buyer/lessor. The interest rate implicit in the lease is 4.5% and the present value of the annual payments is: $ 120,000/1.045 114,833 120,000/1.0452 109,888 120,000/1.0453 105,155 120,000/1.0454 100,627 120,000/1.0455 96,294 526,797 Of this, $476,797 relates to the lease and $50,000 relates to the additional financing. At the commencement date, the seller/lessee measures the right-of-use asset arising from the leaseback of the building at the proportion of the previous carrying amount of the building that relates to the right-of-use retained. This is calculated as carrying amount discounted lease payments/fair value. In our example: $600,000x476,797/750,000 $381/497 The seller/lessee only recognises the amount of gain that relates to the rights transferred. The gain on sale of the building is $150,000(750,000-600,000), of which: (a) 150,000x476,797/750,000-$95,360 - relates to the rights retained (b) The balance - 150,000-95,360=$54,640 - relates to the rights transferred to the buyer At the commencement date the lessee accounts for the transaction as follows: Debit Credit $ $ Cash 800,000 Right-of-use asset 381,437 Building 600,000 Financial liability 526,797 Gain on rights transferred 54,640 1,181,437 1,181,437 The right-of-use asset will be depreciated over five years, the gain will be recognised in profit or loss and the financial liability will be increased each year by the interest charge and reduce hy the lease navments. Example 2 The seller/lessee sells a building to the buyer/lessor for $800,000 cash. The carrying amount of the building prior to the sale was $600,000. The seller/lessee arranges to lease the building back for five years at $120,000 per annum, payable in arrears. The remaining useful life is 15 years. The transaction satisfies the performance obligations in IFRS 15, so will be accounted for as a sale and leaseback.At the date of sale the fair value of the building was $750,000, so the excess $50,000 paid by the buyer is recognised as additional financing provided by the buyer/lessor. The interest rate implicit in the lease is 4.5% and the present value of the annual payments is: $ 120,000/1.045 114,833 120,000/1.0452 109,888 120,000/1.0453 105,155 120,000/1.0454 100,627 120,000/1.0455 96,294 526,797 Of this, $476,797 relates to the lease and $50,000 relates to the additional financing. At the commencement date, the seller/lessee measures the right-of-use asset arising from the leaseback of the building at the proportion of the previous carrying amount of the building that relates to the right-of-use retained. This is calculated as carrying amount discounted lease payments/fair value. In our example: $600,000x476,797/750,000 $381/497 The seller/lessee only recognises the amount of gain that relates to the rights transferred. The gain on sale of the building is $150,000(750,000-600,000), of which: (a) 150,000x476,797/750,000-$95,360 - relates to the rights retained (b) The balance - 150,000-95,360=$54,640 - relates to the rights transferred to the buyer At the commencement date the lessee accounts for the transaction as follows: Debit Credit $ $ Cash 800,000 Right-of-use asset 381,437 Building 600,000 Financial liability 526,797 Gain on rights transferred 54,640 1,181,437 1,181,437 The right-of-use asset will be depreciated over five years, the gain will be recognised in profit or loss and the financial liability will be increased each year by the interest charge and reduce hy the lease navments