A Ltd. (Seller-lessee) sells a building to B Ltd. (Buyer-lessor) for cash of 60,00,000. Immediately before the transaction, the building is carried…

(a) A Ltd. and B Ltd. will account for the transaction as a sale and leaseback. Step 1 Since the consideration for the sale of the building is not at fair value, A Ltd. and B Ltd. make adjustments to measure the sale proceeds at fair value. Thus, the amount of the excess sale price of 6,00,000 (as calculated below) is recognised as additional financing provided by B Ltd. to A Ltd. Sale Price: 60,00,000 Less: Fair Value (at the date of sale): (54,00,000) Additional financing provided by B Ltd. to A Ltd. 6,00,000 Step 2 Calculation of the present value of the annual payments which amounts to 29,88,000 (calculated considering 20 payments of 4,00,000 each, discounted at 12% p.a.) of which - 6,00,000 relates to the additional financing (as calculated above) and balance - 23,88,000 relates to the lease corresponding to 20 annual payments of 80,320 and - 3,19,680, respectively (refer calculations below). Proportion of annual lease payments: Present value of lease payments (as calculated above) (A) 29,88,000 Additional financing provided (as calculated above) (B) 6,00,000 Relating to the Additional financing provided (C) = (E x B / A) 80,320 Relating to the Lease (D) = (E – C) 3,19,680 Annual payments (at the end of each year) (E) 4,00,000 A Ltd.: At the commencement date, A Ltd. measures the ROU asset arising from the leaseback of the building at the proportion of the previous carrying amount of the building that relates to the right-of-use retained by A Ltd., calculated as follows: Carrying Amount (A) 30,00,000 Fair Value (at the date of sale) (B) 54,00,000 Discounted lease payments for the 20-year ROU asset (C) 23,88,000 ROU Asset [(A / B) x C] 13,26,667 A Ltd. recognises only the amount of the gain that relates to the rights transferred to B Ltd., calculated as follows: Fair Value (at the date of sale) (A) 54,00,000 Carrying Amount (B) 30,00,000 Discounted lease payments for the 20-year ROU asset (C) 23,88,000 Gain on sale of building (D) = (A - B) 24,00,000 Relating to the right to use the building retained by A Ltd. (E) = [(D/A) x C] 10,61,333 Relating to the rights transferred to B Ltd. (D - E) 13,38,667 At the commencement date, A Ltd. accounts for the transaction, as follows: Dr. Cash Dr. 60,00,000 ROU Asset Dr. 13,26,667 To Building 30,00,000 To Financial Liability 29,88,000 To Gain on rights transferred 13,38,667 B Ltd.: At the commencement date, B Ltd. accounts for the transaction, as follows: Dr. Building Dr. 54,00,000 Financial Asset Dr. 6,00,000 (20 payments of 80,320 discounted @ 12% p.a.) (approx.) To Cash 60,00,000 After the commencement date, B Ltd. accounts for the lease by treating - 3,19,680 of the annual payments of 4,00,000 as lease payments. The remaining - 80,320 of annual payments received from A Ltd. are accounted for as: (a) payments received to settle the financial asset of 6,00,000 and (b) interest revenue.