In a sale and leaseback transaction, an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and then leases that same asset back from the buyer-lessor; IFRS 16 sets out how both parties account for the transfer contract and the lease together.
First Step: Is the Transfer a Sale?
The entity applies the requirements for determining when a performance obligation is satisfied in IFRS 15 to determine whether the transfer of the asset is accounted for as a sale of that asset. This assessment is the foundation on which the rest of the accounting for both parties is built.
If the Transfer Meets the Requirements to Be a Sale
If the transfer of the asset by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale of the asset:
- The 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 it has retained, and therefore recognises only the amount of gain or loss that relates to the rights transferred to the buyer-lessor.
- The buyer-lessor accounts for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in this Standard.
If the Transfer Does Not Meet the Requirements to Be a Sale
If the transfer of the asset by the seller-lessee does not satisfy the requirements of IFRS 15 to be accounted for as a sale of the asset:
- The seller-lessee continues to recognise the transferred asset and recognises a financial liability equal to the transfer proceeds, accounting for that financial liability by applying IFRS 9.
- The buyer-lessor does not recognise the transferred asset, and instead recognises a financial asset equal to the transfer proceeds, accounting for it by applying IFRS 9.
Why This Distinction Matters in Practice
This distinction produces a fundamental difference in the financial statements: if the transfer is a genuine sale, the asset is partly derecognised by the seller-lessee and part of the gain or loss is recognised immediately, whereas if it does not meet the sale criteria the whole transaction is instead accounted for as asset-backed financing, without derecognising the asset from the seller-lessee's books.
A Common Context for These Transactions
Many entities enter into sale and leaseback transactions to raise cash from fixed assets such as buildings or equipment while continuing to use them operationally; a careful assessment of whether the transfer meets the sale requirements of IFRS 15 is therefore a decisive step that shapes the financial statements of both parties for years afterwards, not merely a formality at the time the contract is signed.
Legal References
- IFRS 16 — Leases, paragraph 98 (scope of sale and leaseback accounting).
- IFRS 16, paragraph 99 (applying IFRS 15 to determine whether a sale occurred).
- IFRS 16, paragraph 100 (accounting by the seller-lessee and buyer-lessor when a sale occurs).
- IFRS 16, paragraph 103 (accounting by both parties when the sale criteria are not met).
For questions about your specific situation, you can ask the Accounting Helper (private sector) on Helpers, or consult a licensed chartered accountant.