Last updated: 22 December 2019
A sale and leaseback transaction is a transaction where one entity (seller-lessee) transfers an asset to another entity (buyer-lessor) and leases that asset back from the buyer-lessor (IFRS 16.98). For each sale and leaseback transaction, the seller-lessee should determine whether the transfer of an asset is a sale. This should be done by applying IFRS 15 criteria for satisfaction of performance obligations. For example, IFRS 15 states that if an entity has a call option on the asset (i.e. a right to repurchase the asset), the customer does not obtain the control of the asset.
It is sometimes the case that an entity purchases an asset from a manufacturer or a dealer (e.g. because it has significant trade discounts), and then the asset is immediately sold to a lessor and leased back by the entity that originally purchased the asset from a manufacturer/dealer. The legal form of such a transaction does not determine the accounting treatment. If the seller-lessee did not control the asset before it was transferred to the lessor, the whole transaction is not accounted for a sale and leaseback, but as a regular lease (IFRS 16.B45-B47).
The assessment of whether an entity controlled the asset before it was transferred to a lessor can be made based on paragraph IFRS 15.33. Usually, in transactions structured as described above, the entity buying the asset from a manufacturer or a dealer does not control the asset and such a transaction is accounted for as a regular lease.
Transfer of the asset is a sale
Accounting for transfer of the asset that is a sale
When the transfer of the asset is a sale, a seller-lessee measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee (IFRS 16.100a). Gain or loss is recognised only at the amount that relates to the rights transferred to the buyer-lessor. See paragraphs IFRS 16.BC266-BC267 for more discussion and Example 24 accompanying IFRS 16.
When the transfer of the asset is a sale, the buyer-lessor accounts for the purchase of an asset according to applicable IFRS (e.g. IAS 2, IAS 16, IAS 38) and accounts for the lease using lease requirements included in IFRS 16 (IFRS 16.100(b)).
Fair value of consideration different from fair value of the asset
If the fair value of the consideration for the sale of the asset is different from the fair value of the asset, or if the payments for the lease are not at market rates, an entity makes the following adjustments (IFRS 16.101):
- consideration for the sale of the asset is recognised at fair value
- any below-market terms are treated as a prepayment of lease payments
- any above-market terms are treated as additional financing provided by the buyer-lessor to the seller-lessee
The adjustment described above is measured on the basis of the more readily determinable of 1/ the difference between the fair value of the consideration for the sale and the fair value of the asset or 2/ the difference between the present value of the contractual payments for the lease and the present value of payments for the lease at market rates (IFRS 16.102).
See Example 24 accompanying IFRS 16.
Transfer of the asset is not a sale
When the transfer of the asset is not a sale under IFRS 15 requirements, seller-lessee and buyer-lessor recognise a financial liability and financial asset under IFRS 9, respectively. The underlying asset remains in the statement of financial position of the seller-lessee all the time.
More about IFRS 16
See other pages relating to IFRS 16: