Sale and Lease Back
When the owner of an asset is in a severe financial crunch, they may sell the asset but lose the ability to use it. If they mortgage the asset, the funds raised may not meet their financial needs. In such a situation, where significant financing is required while still needing the asset for operations, the only option might be to sell the asset at a high price to a financier. The financier, who may benefit from tax advantages and other factors, can accept payment in instalments while allowing the seller (now the lessee) to continue using the asset for their operations.
As a result, the selling price may not reflect the fair value of the asset. Therefore, the difference between the selling price and the carrying amount cannot be simply classified as profit or loss. How this difference is accounted for depends on the type of lease agreement the two parties enter into.
By CA L.Muralidharan and CPA L.Mukundan
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