Nightjar Co sold its head office to a bank for $10,000,000, which is its fair value, and immediately leased it back for 10 years. The building's carrying amount was $6,000,000. The transfer meets the IFRS 15 definition of a sale. The present value of the lease payments is $3,000,000. What gain on disposal should Nightjar Co recognise in profit or loss?

Correct answer: D) $2,800,000

Explanation

Total gain = $10,000,000 - $6,000,000 = $4,000,000. The right-of-use asset is measured at the proportion of the old carrying amount that relates to the right retained: $6,000,000 x $3,000,000/$10,000,000 = $1,800,000 (this is the asset, not the gain). Only the gain on the rights transferred to the bank is recognised: $4,000,000 x ($10,000,000 - $3,000,000)/$10,000,000 = $2,800,000. The remaining $1,200,000 relates to the rights retained and is not recognised. Check: Dr cash $10,000,000, Dr right-of-use asset $1,800,000, Cr building $6,000,000, Cr lease liability $3,000,000, Cr gain $2,800,000.