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).
- Gain on Sale: Full Gain × ([Fair Value - Lease Liability] ÷ Fair Value).
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)]