My answers are at the bottom, but I’m not sure if they are right or not.   Along with what paragraphs to use for IFRS.  I know its IFRS 16 but I’m lost when it comes to what paragraph to use for the questions.   If someone can please verify my answers are correct?  Thank you

The format requirements for the research assignments are as follows: 

Restate or repeat the questions; 

Provide your answers using complete statements and proper grammar. 

Provide proper references from FASB Codification in proper form, such as  ASC 350-20-35-3 or ASC 450-20-25-2. 

Provide proper references from IFRS in proper form, such as IAS 10, para. 6 or IFRS 13, para. 8. 

Note: The references must be specific to the paragraphs. You must incorporate the reference numbers, such as ASC 350-20-35-3 or IAS 10, para. 6, in your discussions. The paragraphs copied from the Codification or IFRS may either be included together with your reference numbers or be attached at the end of your research paper. 

FASB ASC and IFRS Research Case

Snack That Sale and Leaseback

Snack That Inc. (“Snack That”) is a snack food and bakery product company with a large 

manufacturing and distribution facility in Evansville, Indiana. Snack That frequently sends 

employees from its smaller manufacturing and distribution facilities to Evansville for training 

opportunities, as well as employees from its corporate office to perform quality checks and test 

controls.

To manage travel expenses for hotel and vehicle rentals, Snack That owns a corporate housing 

facility and shuttle to lodge and transport its employees to and from the manufacturing and 

distribution facility.

In 2018, Snack That launched a corporate initiative to free up cash to fund a new snack product 

line. As a result, on July 1, 2018, Snack That entered into a sale-and-leaseback arrangement with 

Rent That Inc. (“Rent That”) for both its corporate housing facility and its shuttle. Assume the 

agreement meets the definition of a contract under ASC 606-10-25-1 through 25-8 and that 

certain of the indicators related to the transfer of control of a point-in-time performance 

obligation (i.e., the housing facility and the shuttle being transferred from Snack That to Rent 

That) in ASC 606-10-25-30 have been met. Further assume that the inception of the contract and 

the commencement of the lease are both on July 1, 2018, and that Snack That adopted ASC 842 

prior to 2018.

Key facts related to sale-and-leaseback transactions are as follows:

  Corporate housing facility:

• Carrying amount of the asset — $600,000.
• Fair value of the asset — $900,000.
• Remaining economic life of the asset — 28 years.
• Sales price of asset — $900,000.
• The lease term is 10 years and there are no options to renew.
• The lease payments are paid annually and are fixed at $70,000 per year.
• The present value of the lease payments is based on Snack That’s incremental

            borrowing rate and equals $540,521.

• Ownership does not transfer to Snack That at the end of the lease.
• The agreement contains an option for Snack That to repurchase the housing

            facility at the end of the lease term for the then fair market value. At lease 

            commencement, Snack That concludes that exercise of the purchase option is not 

            reasonably certain.

• The facility is not specialized and will have alternative use to Rent That at the end

            of the lease.

• There are many corporate housing facilities in the area that frequently come up

            for sale.

  Shuttle:

• Carrying amount of the asset — $40,000.
• Fair value of the asset — $50,000.
• Remaining economic life of the asset — 8 years.
• Sales price of the asset — $50,000.
• The lease term is 7 years with no renewal options.
• The lease payments are paid annually at a fixed amount of $7,000 per year.
• The present value of minimum lease payments based on Snack That’s incremental

            borrowing rate and equals $40,504.

• Ownership does not transfer to Snack That at the end of the lease.
• The shuttle is not specialized and will have alternative use to Rent That at the end

            of the lease.

• Snack That has an option to repurchase the shuttle at the end of the lease for the

            then fair market value. At lease commencement, Snack That concludes that 

            exercise of the purchase option is not reasonably certain.

• There are many similar shuttles that are readily available in the marketplace.

Required: 

Based on both US GAAP and IFRS/IAS, please answer the following questions.

1. How much gain on derecognition of the corporate housing facility should Snack That, as 

seller-lessee, recognize as a result of the sale?

2. How much gain on derecognition of the shuttle should Snack That, as seller-lessee, 

recognize as a result of the sale?

3. How should Rent That, as buyer-lessor, account for the purchase of the corporate housing 

facility and shuttle?

Based on both US GAAP and IFRS/IAS

1. How much gain on derecognition of the corporate housing facility should Snack That, as 

seller-lessee, recognize as a result of the sale?

Under US GAAP (ASC 842-40-25-4), Snack That should recognize a gain on derecognition of the corporate housing facility. The gain is calculated as the difference between the sales price and the carrying amount of the asset. In this case:

Gain on derecognition = Sales price – Carrying amount of the asset

Gain on derecognition = $900,000 – $600,000

Gain on derecognition = $300,000

Under IFRS (IFRS 16), Snack That would recognize any gain or loss on derecognition of the corporate housing facility if the transaction qualifies as a finance lease. The gain would be included in the calculation of the lease liability and right-of-use asset.

ASC 842-40-4: 

If the transfer of the asset is a sale in accordance with paragraphs 842-40-25-1 through 25-3, both of the following apply:

a. The seller-lessee shall:

1. Recognize the transaction price for the sale at the point in time the buyer-lessor obtains control of the asset in accordance with paragraph 606-10-25-30 in accordance with the guidance on determining the transaction price in paragraphs 606-10-32-2 through 32-27

2. Derecognize the carrying amount of the underlying asset.

3. Account for the lease in accordance with Subtopic 842-20

b. The buyer-lessor shall account for the purchase in accordance with other Topics and for the lease in accordance with Subtopic 842-30.

1. How much gain on derecognition of the shuttle should Snack That, as seller-lessee, 

recognize as a result of the sale?

Similarly, under US GAAP (ASC 842-40-25-4), Snack That should recognize a gain on derecognition of the shuttle. The gain is calculated as the difference between the sales price and the carrying amount of the asset. In this case:

Gain on derecognition = Sales price – Carrying amount of the asset

Gain on derecognition = $50,000 – $40,000

Gain on derecognition = $10,000

Similar to the corporate housing facility, Snack That should recognize the gain on derecognition of the shuttle which would not be recognized separately under IFRS 16. It would be included in the calculation of the lease liability and right-of-use asset.

ASC 842-40-4: 

If the transfer of the asset is a sale in accordance with paragraphs 842-40-25-1 through 25-3, both of the following apply:

a. The seller-lessee shall:

1. Recognize the transaction price for the sale at the point in time the buyer-lessor obtains control of the asset in accordance with paragraph 606-10-25-30 in accordance with the guidance on determining the transaction price in paragraphs 606-10-32-2 through 32-27

2. Derecognize the carrying amount of the underlying asset.

3. Account for the lease in accordance with Subtopic 842-20

b. The buyer-lessor shall account for the purchase in accordance with other Topics and for the lease in accordance with Subtopic 842-30.

3. How should Rent That, as buyer-lessor, account for the purchase of the corporate housing facility and shuttle?

Under both US GAAP (ASC 842-40-25-5) and IFRS (IFRS 16), Rent That would account for the purchase of the corporate housing facility and shuttle as a finance lease. Rent That would recognize the assets as right-of-use assets and record a corresponding lease liability. The lease liability would be equal to the present value of the lease payments, determined using Snack That’s incremental borrowing rate. Rent That would then recognize the lease payments received from Snack That as lease income over the lease term. The lease income would be allocated between principal and interest using the effective interest method.

Rent That would then recognize the lease payments received from Snack That as lease income over the lease term. The lease income would be allocated between principal and interest using the effective interest method.

ASC 842-40-25-5:

If the transfer of the asset is not a sale in accordance with paragraphs 842-40-25-1 through 25-3, both of the following apply:

1. The seller-lessee shall not derecognize the transferred asset and shall account for any amounts received as a financial liability in accordance with other Topics.
2. The buyer-lessor shall not recognize the transferred asset and shall account for the amounts paid as a receivable in accordance with other Topics.