Refer Case Study 1 DETERMINE the appropriate accounting treatment for the sale-and-leaseback transaction involving the 10 aircraft with ZEAL in May…

The sale of aircraft between COAL and ZEAL is not at fair value. Since the sale price is higher than the fair value, there is an additional financing being provided by ZEAL to COAL through this sale and lease back transaction. The sale price of each aircraft is ₹ 100 crores, while the fair value of each aircraft is only ₹ 75 crores. Therefore, COAL is receiving an additional financing from ZEAL to the tune of ₹ 25 crores. Therefore, the overall sale value of 10 aircraft is ₹ 1,000 crores, the fair value of 10 aircraft is ₹ 750 crores. This provides COAL with an additional ₹ 250 crores funding from ZEAL as part of this sale and lease back transaction. The annual lease payment for the aircraft of ₹ 12 crore per aircraft. The lease period is for 9 years, with the implicit rate being 10% p.a. The PVIFA for the lease payments would be 5.7590. We need to find out how much of this payment relates to the lease and how much to the additional financing being provided. The calculations below would help to understand this bifurcation: Table 1: Bifurcation of lease payments Particulars ₹ crores Per aircraft ₹ crores 10 aircraft Present value of annual lease payments (lease payment of ₹ 12 crores per year per aircraft × PVIFA of 5.759) 69.1080 691.08 Additional financing provided by ZEAL 25 250 Annual lease payments 12 120 Annual lease payments relating to additional financing (Additional financing/PV of lease payments) × (annual lease payments) = (25 crores / 69.1080 crores) × (12 crores for each aircraft) 4.3410 43.410 Annual lease payments relating to leasing arrangement 7.6590 76.590 In summary, out of the total annual lease payments of ₹ 120 crores for 10 aircraft, ₹ 43.410 crores relates to additional financing received from ZEAL and the balance ₹ 76.590 crores relates to leasing arrangement. At the commencement date in May 2026, COAL has to measure the Right to Use (ROU) asset arising from leaseback of the aircraft at the proportion of the carrying amount of the aircraft that relates to the right-of-use retained by itself. Table 2: ROU asset retained by COA Particulars ₹ crores Per aircraft ₹ crores 10 aircraft Carrying cost of the aircraft 60 600 Fair value of aircraft 75 750 Discounted lease payments Annual lease payments relating to lease payments from Table 1 above × PVIFA = ₹ 7.6590 crores x 5.759 = 44.108 crores 44.1080 441.08 ROU asset retained by COA (Carrying cost of the aircraft/ fair value of aircraft) × Discounted lease payments (₹ 60 crores/ ₹ 75 crores) × 44.1080 per aircraft 35.2864 352.864 Therefore, the ROU asset retained by COAL is ₹ 35.2864 crores per aircraft, which totally for 10 aircraft amounts to ₹ 352.864 crores. This Right-of-use (ROU) represents the value of rights it has retained through the lease. The original carrying amount of the amount of the aircraft that is ₹ 60 crores per aircraft is derecognized, instead the ROU asset of ₹ 35.2864 crores per aircraft is recognized as an asset in the Balance Sheet. Also, each aircraft is being sold for a gain of ₹ 15 crores, comparing the fair value and carrying value of each aircraft. This also needs to be bifurcated into that which relates to ROU retained by COAL and that which relates to rights transferred to ZEAL. Table 3: Bifurcation of gain on sale of aircraft Particulars ₹ crores Per aircraft ₹ crores 10 aircraft Fair value of aircraft 75 750 Carrying cost of the aircraft 60 600 Discounted lease payments from Table 2 44.1080 441.08 Gain on sale of aircraft 15 150 Relating to ROU of COA (Discounted lease payments/ Fair value) × Gain on sale of aircraft (44.108/75) ×15 crores per aircraft 8.8216 88.216 Relating to rights transferred to ZEAL 6.1784 61.784 The gain relating to the rights transferred to ZEAL that is ₹ 6.1784 crores per aircraft, amounting to ₹ 61.784 crores for 10 aircraft will be recognized in the income statement for the year. Therefore, at the commencement of the lease in May 2026, COAL will account for the transaction as follows: Particulars Debit (₹) Credit (₹) Cash Dr. 1,000 crores Right-of-use asset Dr. 352.864 crores To Cost of aircraft 600 crores To Lease Liability 691.080 crores To Gain on rights transferred 61.784 crores