Sale and leaseback transactions: As
per AS 19 on ‘Leases’, a sale and leaseback transaction involves the
sale of an asset by the vendor and the leasing of the asset back to the
vendor. The lease payments and the sale price are usually
interdependent, as they are negotiated as a package. The accounting
treatment of a sale and lease back transaction depends upon the type of
lease involved.
If a sale and leaseback transaction results in a finance lease, any excess or deficiency of sale proceeds over the carrying amount should be deferred and amortized over the lease term in proportion to the depreciation of the leased asset.
If sale and leaseback transaction results in a operating lease, and it is clear that the transaction is established at fair value, any profit or loss should be recognized immediately. If the sale price is below fair value any profit or loss should be recognized immediately except that, if the loss is compensated by future lease payments at below market price, it should be deferred and amortized in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the excess over fair value should be deferred and amortized over the period for which the asset is expected to be used.