Sale and Leaseback Transactions
A sale and leaseback occurs when an entity sells an asset and then leases it back from the buyer. This is a classic exam "level 3" topic.
1Step 1: Is it a "Sale"?
You must check if the transfer of the asset is a "sale" according to IFRS 15 (Revenue from Contracts with Customers).
NOT a Sale
The "seller-lessee" continues to recognize the asset and accounts for the proceeds as a Financial Liability (essentially a loan).
YES, it's a Sale
Account for the transaction as a sale and a leaseback using the ROU model.
2If it is a Sale: The Proportion Model
The key trick here: You do NOT recognize the full gain on the sale.
Calculation Roadmap:
- ROU Asset: Previous carrying amount × (Lease Liability ÷ Fair Value of Asset). If the sale price is above market, use the lease liability excluding the additional financing.
- Gain on Sale: Full Gain (Fair Value - Carrying Amount) × ([Fair Value - Lease Liability] ÷ Fair Value), using the same lease liability figure as step 1.
- After Day 1: Set the leaseback's lease payments (and any revised lease payments) so that no gain or loss is recognised on the right of use retained (IFRS 16.102A, effective 1 January 2024). This matters when the leaseback payments are variable and not linked to an index or rate.
We only recognize the gain that relates to the Rights Transferred to the buyer-lessor. The portion of the gain relating to the right to use the asset that we've kept is offset against the ROU asset.
3Adjustments for Non-Fair Value
If the sale price or the lease payments are NOT at market value, we must adjust:
- Below Market: Account for as a prepayment of lease payments.
- Above Market: Account for as additional financing provided by the buyer-lessor to the seller-lessee.
Exam Hack: Total Sanity Check
In a Sale and Leaseback, your ROU Asset and your Gain on Sale are always linked. If one is wrong, both are wrong. Use the formula:
Recognised Gain = [Total Gain] - [Total Gain * (ROU Asset / Previous Carrying Amount)]