Company A sold machinery having a WDV of ₹ 40 lakh to Company B for ₹ 50 lakh (FV ₹ 50 lakh) and the same machinery was leased back by Company B To Company A. The Lease back is in nature of operating Lease. Being an Auditor suggest the treatment to Company A.
As an auditor, I would suggest that Company A should recognize the profit of ₹10 lakh immediately. In this scenario, Company A has sold the machinery to Company B for ₹50 lakh, even though the written-down value (WDV) of the machinery was ₹40 lakh. The difference of ₹10 lakh between the selling price and the WDV represents a profit on the sale of the machinery. Since the leaseback arrangement is in the nature of an operating lease, and not a finance lease, Company A should recognize the entire profit of ₹10 lakh immediately at the time of the sale. Operating leases are typically treated as normal rental agreements, and any profit or loss on the sale should be recognized upfront.
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