Gain Or Loss On A Sale And Leaseback Transaction

The accounting treatment prescribed by IAS 17  relating to any gain or loss on the sale of an asset in a sale and leaseback transaction may result in the deferral of such gains or losses and their amortization over the lease term.

The Conceptual Framework does not support this accounting treatment, because it results in reporting debit and credit balances in the statement of financial position that do not meet the definitions of assets and liabilities. The Conceptual Framework in paragraph 4.4(b) defines a liability as:  a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

 For example , $750 000 credit balance recorded by the lessee arises from a past event — the sale of the asset — but, as there is no future outflow in respect of this amount, it should not be classified and reported as a liability. Income is defined in paragraph 4.25 of the Conceptual Framework as follows:

 Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

The accounting treatment prescribed by IAS 17 paragraphs 59 and 61 results in entities incorrectly reporting income as liabilities, or expenses as assets. Accordingly, the profit reported in the statement of profit or loss and other comprehensive income will be incorrect, as will the total asset and liability figures reported on the statement of financial position.

This ‘error’ situation will continue throughout the lease term as the ‘deferred credit’ or ‘deferred debit’ balances are amortized to profit and loss. Again, the rationale for this accounting treatment seems to be based on the notion that a lease is a quasi-sale transaction.

There can be only one ‘sale’ recorded for a finance leaseback, and only a ‘real’ profit recorded for an operating leaseback. The reality, of course, is that the two transactions should be treated independently and recorded in accordance with the Conceptual Framework.