A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. As a result of the sale and leaseback transaction in 2011, what is the difference between income using U.S. GAAP and IFRS in 2011?

Question

Quizplus · Accepted Answer

Under U.S. GAAP, the sale of the building would likely be treated as a sale with financing, as the seller has retained the right to use the asset through the leaseback agreement. Therefore, the gain on the sale would be deferred and recognized over the term of the leaseback.

Under IFRS, the sale would likely be treated as a finance lease, resulting in the recognition of a financial asset (the receivable for the lease payments) and a liability (the lease obligation). The gain on the sale would be recognized at the outset, but would be offset by the depreciation expense on the asset over the lease term.

As a result, under IFRS, the $100,000 gain would be recognized immediately in 2011, resulting in higher income compared to U.S. GAAP. Therefore, the correct answer is E, IFRS income is $80,000 higher.

A Company Sells a Building to a Bank in 2011