Sports Kenya has decided to sell its main office building to a third party and lease it
Question:
Sports Kenya has decided to sell its main office building to a third party and lease it back on a 10-year lease. The lease has been classified as an operating lease. The current fair value of the property is KShs 5 million and the carrying value of the asset is KShs 4.2 million. The market for property is very difficult in the jurisdiction and Sports Kenya therefore requires guidance on the consequences of selling the office building at a range of prices. The following prices have been achieved in the market during the last few months for similar office buildings:
(i) KShs 5 million
(ii) KShs 6 million
(iii) KShs 4.8 million
(iv) KShs 4 million
Required:
Sports Kenya would like advice on how to account for the sale and leaseback, with an explanation of the effect which the different selling prices would have on the financial statements, assuming that the fair value of the property is KShs 5 million. Refer to International Financial Reporting Standards where appropriate.
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen