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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Fenn Co sells a factory to a buyer and leases it back. The transfer does not satisfy the IFRS 15 criteria for a sale. Which treatment is correct for Fenn?

Fenn keeps the factory on its statement of financial position and recognises a financial liability equal to the proceeds, accounted for under IFRS 9. No sale has occurred, so no gain is recognised and no right-of-use asset is created.

  1. ADerecognise the factory and recognise a right-of-use asset and lease liability
  2. BContinue to recognise the factory and recognise a financial liability equal to the proceeds receivedCorrect
  3. CDerecognise the factory and recognise the full gain in profit or loss
  4. DContinue to recognise the factory and treat the proceeds as deferred income

Explanation

If the transfer is not a sale, the seller-lessee keeps the asset in its books and accounts for the proceeds as a financial liability under IFRS 9. The buyer-lessor correspondingly recognises a financial asset. No gain arises and the proceeds are not deferred income.

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