Sale and leaseback accounting – IFRS 16 makes significant changes to sale and leaseback accounting. A sale and leaseback transaction is one where an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) for consideration and leases that asset back from the buyer-lessor.
A sale and leaseback transaction is a popular way for entities to secure long-term financing from substantial property, plant and equipment assets such as land and buildings. IAS 17 covered the accounting for a sale and leaseback transaction in considerable detail but only from the perspective of the seller-lessee. As IFRS 16 has withdrawn the concepts of operating leases and finance leases from lessee accounting, the accounting requirements that the seller-lessee must apply to a sale and leaseback are more straight forward.
In addition, IFRS 16 provides an overview of the accounting requirements for buyer-lessors too. When a seller-lessee has undertaken a sale and lease back transaction with a buyer-lessor, both the seller-lessee and the buyer-lessor must first determine whether the transfer qualifies as a sale. This determination is based on the requirements for satisfying a performance obligation in IFRS 15 ‘Revenue from Contracts with Customers’. The accounting treatment will vary depending on whether or not the transfer qualifies as a sale.
Transfer of the asset is a sale
If the transfer qualifies as a sale and the transaction is on market terms the seller-lessee effectively splits the previous carrying amount of the underlying asset into:
- a right-of-use asset arising from the leaseback, and Sale and leaseback accounting
- the rights in the underlying asset retained by the buyer-lessor at the end of the leaseback. Sale and leaseback accounting
The seller-lessee recognises a portion of the total gain or loss on the sale. The amount recognised is calculated by splitting the total gain or loss into:
- an unrecognised amount relating to the rights retained by the seller-lessee, and Sale and leaseback accounting
- a recognised amount relating to the buyer-lessor’s rights in the underlying asset at the end of the leaseback. The leaseback itself is then accounted for under the lessee accounting model.
The buyer-lessor accounts for the purchase in accordance with the applicable standards (eg IAS 16 ‘Property, Plant and Equipment’ if the asset is property, plant or equipment or IAS 40 ‘Investment Property’ if the property is investment property). The lease is then accounted for as either a finance lease or an operating lease using IFRS 16’s lessor accounting requirements.
Adjustments are required if consideration for the sale is not at fair value and/or payments for the lease are not at market rates. These adjustments result in recognition of: • a prepayment to reflect below-market terms • additional financing provided by the buyer-lessor to the seller-lessee to reflect above-market terms.
Transfer of the asset is not a sale
If the transfer does not qualify as a sale the parties account for it as a financing transaction. This means that: Sale and leaseback accounting
- the seller-lessee continues to recognise the asset on its balance sheet as there is no sale. The seller-lessee accounts for proceeds from the sale and leaseback as a financial liability in accordance with IFRS 9. This arrangement is similar to a loan secured over the underlying asset – in other words a financing transaction
- the buyer-lessor has not purchased the underlying asset and therefore does not recognise the transferred asset on its balance sheet. Instead, the buyer-lessor accounts for the amounts paid to the seller-lessee as a financial asset in accordance with IFRS 9. From the perspective of the buyer-lessor, this arrangement is a financing transaction.
The case – Sale and leaseback
SellCo sells a building to BuyCo for cash of CU1,800,000, which is its fair value at that date. The previous carrying value of the building is CU1,000,000. At the same time, SellCo enters into a lease with BuyCo conveying back the right to use the building for 18 years. Annual payments are CU120,000 payable at the end of each year, which is at market rate. The transfer qualifies as a sale based on the guidance on satisfying a performance obligation in IFRS 15. The rate implicit in the lease is 4.5%, which is readily determinable by SellCo.
SellCo Sale and leaseback accounting
The present value of the annual payments (18 payments of CU120,000, discounted at 4.5%) is CU1,459,200. SellCo measures the right-of-use asset retained through the leaseback as a proportion of the previous carrying amount of the building. This is calculated as: CU1,000,000 (previous carrying value) x [CU1,459,200 (PV of lease payments)/ CU1,800,000 (fair value of building)]. The right-of-use asset calculated in this way is CU810,667. SellCo recognises a portion of the total gain on the sale, to the extent it relates to the rights retained in the underlying asset by BuyCo at the end of the leaseback. The total gain on sale of building is CU800,000 (CU1,800,000 – CU1,000,000). This total is split into: Sale and leaseback accounting
- the portion relating to the rights to use the building retained by SellCo, calculated as CU800,000 x [CU1,459,200/ CU1,800,000] which is CU648,533; and
- the portion relating to BuyCo’s rights in the underlying asset at the end of the leaseback, calculated as CU800,000 x [(CU1,800,000 – CU1,459,200)/CU1,800,000], which is CU151,467.
At the commencement date, SellCo’s accounting entries are: Sale and leaseback accounting
BuyCo The case – Sale and leaseback
At the commencement date, BuyCo’s accounting entries are: The case – Sale and leaseback
BuyCo classifies the lease as an operating lease taking into account, among other things, that the present value of the lease payments is 19% less than the fair value of the building. BuyCo accounts for the lease accordingly.
Sale and leaseback accounting
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