The first question: What is “sale and leaseback”?
An entity (a Seller – lessee) sells or transfers its manufacturing machinery to a financial institution (a buyer – lessor) and the lessee simultaneously leases it back from the buyer. The use of that machinery is continued by the seller with an agreed upon monthly payment (The Rent). Usually, the term in the sale and leaseback contract is long-term.
A sale-leaseback can be helpful and advantageous on the financial front. It provides companies with options to optimize cash flow, increase liquidity and improve their balance sheet presentations. As for businesses that are in need of flexibility in structuring financial matters, leveraging the non – current assets is a strategic way to procure capital for growth or restructuring their system. Moreover, companies can also reduce their taxes by showing the sale-leaseback rental expense.
The 2nd question: How to accounting for sale-leaseback transaction in your journal?
In today’s competitive business environment, increasing profit and reducing tax obligation are of the essence. Many global corporations (including Vietnamese companies), especially which are in the field of airlines, resort services, and condotel have been applying this transaction to boost their profits in Finacial Statement. So, is this a sale activity?
According to the “Substance over form” principle, sale and leaseback transaction is not the normal asset sale operation, but a long-term financing operation. Assets which are sold are considered as collateral in this sponsorship business. The Circular 200 (Viet Nam) provides guidance on the accounting of Vietnamese enterprises, the lessee (the seller) in the sale-leaseback transaction must record the amount received from the asset sale transaction as a liability, particularly on unearned revenue in the balance sheet if the nature of the lease transaction is financial leasing. The lessee (the seller) only record the amount received from the sale transaction into “other income” account in the Statement of Comprehensive Income when the nature of the leaseback transaction is the operating lease. Thus, according to the Vietnamese accounting regime, if it is not eligible to record in revenue account, the money received from the leaseback transaction must be recorded as a loan. Meanwhile, IFRS16 requires that the lessee must record a liability in a rental transaction, whether it is a finance lease or an operating lease, except for the situation where the value of the asset is negligible or the term rent is less than 12 months. That’s to say, it depends on which kind of your company and how your business is run in Viet Nam, the accountants will know the way to deal with this special transaction in accordance with the law.
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