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CA Intermediate · Advanced Accounting · AS 19 Leases

Meridian Pharma Ltd. sells a machine to a finance company and leases it back under a lease that is classified as an operating lease. The machine's carrying amount is Rs 12,00,000 and its fair value at the date of sale is Rs 10,00,000. The sale price is Rs 10,00,000. How should Meridian Pharma treat the difference between carrying amount and sale price?

Meridian Pharma should recognise a loss of Rs 2,00,000 immediately. In a sale and leaseback resulting in an operating lease with the sale price equal to fair value, the loss is recognised at once. Deferral applies only where future rentals below market price compensate for the loss.

  1. ADefer the loss of Rs 2,00,000 and amortise it over the lease term
  2. BRecognise a loss of Rs 2,00,000 immediatelyCorrect
  3. CRecognise a profit of Rs 2,00,000 immediately
  4. DMake no entry for the difference until the machine is finally disposed of

Explanation

In a sale and leaseback that results in an operating lease, where the sale price equals fair value, any profit or loss is recognised immediately. Here the carrying amount of Rs 12,00,000 exceeds fair value, so the loss is 12,00,000 − 10,00,000 = Rs 2,00,000. Deferral applies only to a loss that is compensated by future rentals below market price, which is not the case here.

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