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IFRS 16Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIFRS 16L4 · Expert

Sale and leaseback of the head office and disclosures by the seller-lessee

6 documents7 tasks≈ 90 min
0 / 10 items completed
Standards
IFRS 16 — Leases
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Valtera SA (a fictitious entity), an industrial group, owns its head office. To finance a new campus whose delivery is planned for early 20X4, it sells the building on 1 January 20X1 to Foncière Orsane (a fictitious entity) and leases it back until its relocation. You are preparing, for the consolidated financial statements for the year ended 31 December 20X1, the accounting for the transaction by Valtera, the seller-lessee, and the note on its leases.

Your assignment

Determine whether the transaction is a sale and leaseback transaction and whether the transfer is a sale, calculate the lease liability, the right of use retained and the gain to be recognised, record the entry at 1 January 20X1, measure the impact on the financial statements and prepare the disclosures at 31 December 20X1. One document is not useful and one piece of information is missing.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

6 documents: open each one to read it.

Document 1Contract

Deed of sale and lease agreement

Deed of sale and lease agreement of 1 January 20X1: Valtera sells to Foncière Orsane the building of its head office (land and construction) for a price of 10,000,000, paid in cash on the day of the transfer, and leases it back for a period of 3 years, from 1 January 20X1 to 31 December 20X3. Fixed annual payment of 1,200,000, payable in arrears on 31 December of each year (20X1, 20X2 and 20X3). The agreement contains no purchase option, no extension option and no right for Valtera to repurchase the building.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Transfer date and commencement dateJanuary 1 20X1
Sale price€10,000,000.00
Annual lease payment payable in arrears€1,200,000.00
Lease term3 years
Fair value of the building€10,000,000.00
Carrying amount of the building€6,400,000.00
Lessee's incremental borrowing rate5%
Replacement value as new€12,500,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort6

  • Deed of sale and lease agreement

  • Technical memo on the transfer of control (IFRS 15)

  • Real estate valuer's report

  • Fixed asset register

  • Treasury memo

  • Insurer's certificate

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Professional judgement

        Is the transaction a sale and leaseback transaction and is the transfer a sale?

      2. Task 2Calculation

        Calculate the lease liability at 1 January 20X1.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the lease liability at 1 January 20X1.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Initial lease liability

      3. Task 3Calculation

        Calculate the right of use retained and the gain to be recognised on the rights transferred.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the right of use retained and the gain to be recognised on the rights transferred.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €

        Checks

        • 0 / 6 steps entered
        • Amounts readable

        Result: Gain relating to the right retained, not recognised

      4. Task 4Journal entries

        Which entry do you record at 1 January 20X1?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        4. Line 4

        5. Line 5

        TotalsDebit0Credit0

      5. Task 5Effects on the financial statements

        What is the impact of the transaction on the consolidated financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        5. Notes

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      6. Task 6Analysis

        Which disclosures do you provide in the note at 31 December 20X1?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Which disclosures do you provide in the note at 31 December 20X1?

        1. €
        2. €
        3. €
        4. €
        5. €

        Checks

        • 0 / 5 steps entered
        • Amounts readable

        Result: Total lease payments still due (maturity analysis)

      7. Task 7Conclusion

        Write the conclusion.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 10).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 16 §98
      • IFRS 16 §99
      • IFRS 16 §100
      • IFRS 16 §101
      • IFRS 16 §102
      • IFRS 16 §102A
      • IFRS 16 §51
      • IFRS 16 §52
      • IFRS 16 §53
      • IFRS 16 §54
      • IFRS 16 §58
      • IFRS 16 §59
      • IFRS 16 §B48
      • IFRS 16 §B52