Question 2 Triangle Ltd specialises in building high quality executive flats in

Question

Question 2 Triangle Ltd specialises in building high quality executive flats in city centres. On1 March 20X6 it sells a plot of building land to Finance plc, an unconnected company, for £1.5m. Triangle Ltd retains rights of access and supervision over the plot, the right to build on this land until 28 February 20X8 and the right to buy the plot back again on that date for £1.9m. On 1 March 20X6 the plot is valued at £2.5m. Explain how this sale transaction would be dealt with in Triangle Ltd's financial statements for the year ended 28 February 20X7

Explanation / Answer

Repo Arrangements :-

Under IAS-18, the recognition criteria are applied to two or more transactions together when they are linked in such

A way that the commercial effect cannot be understood without reference to the series of transactions as a whole.

For example, an enterprise may sell goods and, at the same time, enter into a separate agreement to repurchase

The goods at a later date, thus negating the substantive effect of the transaction; in such A case , the two transactions are dealt with together. In the case of repo arrangements requires that such transactions should be recorded as financing arrangement; the resulting cash inflow is not revenue and therefore not be recognized as revenue.

In the above case Triangle Ltd agrees to buy the plot back again on later date. Also, the repurchase price is pre-determined and covers Finance plc purchasing and holding costs. Hence the transaction between Triangle Ltd and Finance plc on 28 February 20X8 should be accounted for as financing transaction rather than as sale.

Journal entries in the books of Triangle Ltd

1 March 20X6 Bank a/c Dr £1.5m

                        To Advance from Finance plc £1.5m

(Being amount received as per sale and repurchasing agreement)

28 February 20X7 Finance Charges a/c Dr £0.2m

                               To Advance from Finance plc £0.2m

(Being finance charges £0.4m for 2 years i.e £0.4×1/2 years)

28 February 20X7 Profit and Loss a/c Dr £0.2m

                              To Finance Charges £0.2m

(Being amount transferred to profit and loss a/c)

Disclosure in the Balance Sheet

Balance sheet of Triangle Ltd as on 28 February 20X7 (Extract)

Assets (under the head Current Assets)

Bank balance includes   £1.5m

Liabilities (under the head Current Liabilities)

Advance from Finance plc        £1.5m

Add: accrued finance charges £0.2m

           Total                               £1.7m

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