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CMA Final · Corporate Financial Reporting · Leases (Ind AS 116)

Anand Engineering Ltd sells a building to a financier for Rs 10,00,000, its fair value, and leases it back. The carrying amount of the building is Rs 8,00,000. The present value of the lease payments is Rs 4,00,000. The transfer qualifies as a sale. What right-of-use asset and gain on rights transferred does Anand recognise at the date of sale?

The right-of-use asset is Rs 3,20,000 and the gain recognised is Rs 1,20,000. The retained portion is 40% (Rs 4,00,000 of Rs 10,00,000 fair value) applied to the carrying amount of Rs 8,00,000, and only 60% of the Rs 2,00,000 total gain relates to rights actually transferred.

  1. ARight-of-use asset Rs 3,20,000; gain Rs 1,20,000Correct
  2. BRight-of-use asset Rs 4,00,000; gain Rs 2,00,000
  3. CRight-of-use asset Rs 3,20,000; gain Rs 2,00,000
  4. DRight-of-use asset Rs 4,80,000; gain Rs 1,20,000

Explanation

The retained proportion is 4,00,000/10,00,000 = 40%, so the right-of-use asset is 40% x 8,00,000 = 3,20,000. Total gain is 2,00,000, and only the 60% relating to rights transferred is recognised, which is 1,20,000. Recognising the full gain of 2,00,000 ignores the retained right of use.

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