ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework
Verity Co sells a building to a bank and leases it back. Management wants to derecognise the building because it will no longer have legal title, although Verity keeps using it for the rest of its life, retains substantially all the benefits and bears all the risks. Applying the Conceptual Framework's derecognition guidance, which approach is most appropriate?
Verity should keep recognising the building if removing it would not faithfully represent the transaction. Because it retains control and substantially all risks and rewards, substance prevails over legal title, and the proceeds are better shown as a financing obligation rather than as a sale gain.
- ADerecognise the building because legal title has passed to the bank.
- BDerecognise the building and recognise a gain equal to the full proceeds.
- CContinue to recognise the building if derecognition would not faithfully represent the transaction, since Verity retains control or substantially all risks and rewards, and consider showing the proceeds as a financing obligation.Correct
- DDerecognise the building but disclose the retained risks only in a note, with no further recognition.
Explanation
The Framework requires derecognition to faithfully represent both the assets and liabilities retained after the transaction and the change in the entity's assets and liabilities. Where the entity retains control or substantially all risks and rewards, removing the asset would not faithfully represent substance over legal form. Legal title alone is not decisive, and recognising a full gain would misrepresent the position. Note-only disclosure is inadequate when an asset or obligation remains.
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