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The accounting standards for Sale and leaseback transactions are changed from Ind AS 17 to IndAS 116. Builders and companies generally use the arrangement of sale and leaseback with a high cost of fixed assets such as land, building, or expensive machinery. The company generally use this type of arrangement when they want to utilise the assets they have invested in for other purposes. Still, at the same time, they want to retain the property to operate their business. It can act as an alternative source of raising capital. This arrangement improves the company’s balance sheet by removing the debt and increasing the current asset (by way of cash or lease agreement).
Sale and Leaseback transactions is mentioned under Ind AS 116[1]. It states that it is the arrangement whereby one party (seller-lessee) sells the assets he owns to another party (buyer-lessor) and simultaneously leases back the same asset. The seller—lessee transfers the legal ownership to the buyer-lessor in exchange for money and at the same time retains the possession of property subject to periodical payments by the seller-lessee. In general terms, the arrangement shall include two transactions:
To apply accounting treatments mentioned under Ind AS 116, it is necessary to determine whether the asset transaction between buyer-lessor and seller-lessee is considered a sale under Ind AS 115.
The sale and leaseback transactions are divided into two parts under Ind AS116:
If the transfer of the asset by the Seller-lessee meets the requirements of Ind AS115 for recognising the transfer as a sale, then the accounting treatment of the transfer shall be:
The accounting treatment for the sale of an asset depends on the consideration value. IND AS 116 provides two situations under which the adjustment is allowed to measure the sale proceeds at fair value.
Further, the accounting treatment for sale proceeds shall be:
If the entity wants to measure any potentialmeasurements under (Accounting Treatment in the books of Seller-lessee and Accounting Treatment in the books of Buyer-lessor), the same can be done through:
The sale and leaseback transactions provide the company with the facility to raise capital and, at the same time, utilise the assets for fulfilling the objectives of the business by using the asset. The arrangement provides the regular cash flow of the income and reduces the financial liability of the company. The Indian accounting standards provide that the company shall not use any unfair means of accounting treatments to avoid any tax liability.
Read our Article: An Overview of Financial Lease Accounting in India
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