ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Corvo Co sells a property to Delta Co for $2,400,000 and leases it back. The transfer is a sale. The property's fair value is $2,000,000. How should Corvo treat the excess of the sale price over fair value?
The $400,000 excess over fair value is not income. It is treated as additional financing from the buyer-lessor, so Corvo recognises a financial liability under IFRS 9 for that amount. Only the fair value element is treated as sale proceeds in measuring any gain.
- ARecognise the $400,000 as additional gain on sale immediately
- BDefer the $400,000 and release it over the lease term
- CTreat it as additional financing provided by Delta to Corvo, recognised as a financial liabilityCorrect
- DDeduct it from the right-of-use asset
Explanation
Where the sale price exceeds fair value, the excess is accounted for as additional financing from the buyer-lessor to the seller-lessee, under IFRS 9. It is not a gain. Deferral over the lease term and netting against the right-of-use asset are not the IFRS 16 treatments.
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