Key Takeaways
- Apply IFRS 15 revenue recognition criteria to determine if the transfer of an asset qualifies as a sale
- If the transfer is a sale, the seller-lessee recognises only the gain relating to rights transferred to the buyer-lessor
- The right-of-use asset is measured as the proportion of the previous carrying amount retained
- If the transfer is NOT a sale, account for the arrangement as a financing transaction
- Adjustments are required when sale proceeds are below or above market terms
What is a Sale and Leaseback?
A sale and leaseback transaction occurs when an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and then leases that asset back. These transactions are often used to release capital tied up in assets while retaining the right to use those assets.
Under IFRS 16, the accounting for sale and leaseback transactions depends critically on whether the transfer of the asset satisfies the requirements in IFRS 15 Revenue from Contracts with Customers to be accounted for as a sale.
IFRS 16 Requirement
"If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor shall account for the transfer contract and the lease applying paragraphs 99-103."
- IFRS 16.98
Does the Transfer Qualify as a Sale?
The first step in accounting for a sale and leaseback is determining whether the transfer of the asset qualifies as a sale under IFRS 15. This assessment focuses on whether control of the asset has transferred to the buyer-lessor.
IFRS 15 Control Indicators
Control is transferred when the customer (buyer-lessor) has:
When Transfer Does NOT Qualify as a Sale
The transfer does not qualify as a sale if:
- The seller-lessee has a substantive repurchase option (call option at fixed price)
- The buyer-lessor has a put option requiring the seller-lessee to repurchase
- The leaseback is a finance lease from the buyer-lessor's perspective and the asset is not of a specialised nature
- Other arrangements exist that prevent the transfer of control
Repurchase Options
A repurchase option at a fixed price generally prevents the transfer from qualifying as a sale because the buyer-lessor does not obtain control - they cannot direct the use of the asset and obtain substantially all remaining benefits if the seller can repurchase it.
Seller-Lessee Accounting: Transfer IS a Sale
When the transfer qualifies as a sale, the seller-lessee must:
Derecognise the Asset
Remove the asset from the balance sheet at its carrying amount.
Recognise the Right-of-Use Asset
Measure the ROU asset at the proportion of the previous carrying amount that relates to the right of use retained:
ROU Asset = Previous Carrying Amount x (PV of Lease Payments / Fair Value of Asset)
Recognise the Lease Liability
Measure at the present value of lease payments, using the rate implicit in the lease or the seller-lessee's incremental borrowing rate.
Recognise Gain or Loss
Only recognise the gain or loss relating to the rights transferred to the buyer-lessor:
Gain/Loss = (Fair Value - Carrying Amount) x (1 - PV of Lease Payments / Fair Value)
The Logic Behind Partial Gain Recognition
The seller-lessee has not disposed of the entire asset - they retain a right to use it through the leaseback. The gain recognised represents only the portion of the asset truly transferred (i.e., the residual value plus the rights during the lease term that the buyer-lessor now controls).
Worked Example: Transfer Qualifies as a Sale
Scenario
Company A sells a building to Company B and immediately leases it back:
- Carrying amount of building: $800,000
- Fair value of building: $1,000,000
- Sale proceeds: $1,000,000 (at fair value)
- Leaseback term: 10 years
- Annual lease payments: $60,000 (paid at year-end)
- Incremental borrowing rate: 5%
Step 1: Calculate the Lease Liability
Present value of lease payments at 5%:
Step 2: Calculate the Right-of-Use Asset
Step 3: Calculate the Gain on Sale
Total potential gain = Fair Value - Carrying Amount = $1,000,000 - $800,000 = $200,000
Proportion of rights transferred = 1 - ($463,347 / $1,000,000) = 53.67%
Journal Entry
Verification
| Component | Amount |
|---|---|
| Cash received | $1,000,000 |
| Less: Lease liability created | ($463,347) |
| Net cash position improvement | $536,653 |
| Gain recognised | $107,331 |
| Gain deferred (in ROU asset) | $92,669 |
| Total gain ($1M - $800k) | $200,000 |
Seller-Lessee Accounting: Transfer is NOT a Sale
When the transfer does not qualify as a sale under IFRS 15, the seller-lessee:
- Continues to recognise the transferred asset on its balance sheet
- Recognises a financial liability equal to the proceeds received
- Accounts for the "lease" payments as repayments of the financial liability with interest
This treatment reflects the economic substance: the transaction is essentially a secured loan using the asset as collateral.
Financing Transaction
The asset remains on the seller-lessee's balance sheet. Depreciation continues as before. The financial liability is measured at amortised cost, with "lease" payments split between interest expense and principal repayment.
Below or Above Market Terms
IFRS 16 requires adjustments when the sale and leaseback transaction is not at market terms. This can occur with either the sale price or the lease payments.
Below Market Sale Price / Below Market Lease Payments
If the sale price is below fair value but this is compensated by below-market lease payments:
- Account for the shortfall as a prepayment of lease payments
- This prepayment reduces the lease liability recognised
- The gain calculation uses fair value, not the actual proceeds
Above Market Sale Price / Above Market Lease Payments
If the sale price exceeds fair value:
- The excess is additional financing from the buyer-lessor
- Recognise a financial liability for the excess amount
- The gain calculation uses fair value, not the actual proceeds
Example: Below Market Terms
Using the previous example, but with:
- Sale price: $900,000 (below fair value of $1,000,000)
- Annual lease payments: $50,000 (below market rate of $60,000)
The $100,000 shortfall in sale price represents prepaid rent. The lease liability is calculated using the below-market payments, but the gain is calculated as if the transaction were at market terms.
| Situation | Adjustment | Effect |
|---|---|---|
| Sale price below FV, lease payments below market | Prepayment of lease payments | Reduces lease liability |
| Sale price above FV, lease payments above market | Additional financing | Financial liability for excess |
| Sale price below FV, lease payments at market | Genuine below-market sale | Adjust gain calculation |
Variable Payments in Sale and Leaseback
When a sale and leaseback includes variable payments that do not depend on an index or rate (e.g., turnover-based rent), special considerations apply.
Variable payments linked to future performance or use of the asset are:
- Excluded from the lease liability measurement
- Excluded from determining the rights retained by the seller-lessee
- Expensed as incurred during the lease term
This means the proportion of gain recognised may be higher when significant variable payments exist, as less of the "consideration" for the leaseback is captured in the lease liability.
Impact on Gain Recognition
With variable payments excluded from the lease liability, the ratio of lease liability to fair value is lower, meaning a higher proportion of any gain is recognised immediately. Entities should carefully consider whether variable payment structures could be seen as an attempt to accelerate gain recognition.
Buyer-Lessor Accounting
The buyer-lessor applies different accounting depending on whether the transfer qualifies as a sale.
Transfer IS a Sale
The buyer-lessor:
- Recognises the asset in accordance with applicable standards (e.g., IAS 16 for property)
- Applies IFRS 16 lessor accounting for the leaseback (operating or finance lease)
Transfer is NOT a Sale
The buyer-lessor:
- Does not recognise the transferred asset
- Recognises a financial asset (receivable) equal to the amount paid
- Accounts for "lease" receipts as principal and interest income
For detailed guidance on lessor accounting, see our IFRS 16 Lessor Accounting guide.
Summary: Sale and Leaseback Decision Tree
| Question | If Yes | If No |
|---|---|---|
| Does transfer meet IFRS 15 sale criteria? | Proceed to sale accounting | Account as financing |
| Is transaction at market terms? | Use actual amounts | Adjust for prepayment/financing |
| Are there variable payments? | Exclude from lease liability | N/A |
Key principle: The seller-lessee only recognises a gain to the extent that rights have genuinely transferred. Rights retained through the leaseback do not generate gain recognition - the gain is effectively "stored" in the right-of-use asset and released through lower depreciation over the lease term.
This article is provided for general informational purposes only and does not constitute accounting, legal or professional advice.