IFRS 16 Sale and Leaseback a Concept which EXPLAINS that such transaction is accounted for as a ‘sale‘ of an underlying asset and a ‘leaseback‘ of that underlying asset only if the initial transaction QUALIFIES as a sale in accordance with IFRS 15 ‘Revenue from Contracts with Customers‘.
In a ‘Sale and Leaseback transaction’, an entity (the seller-lessee) sells an asset to another entity (the buyer-lessor), which then leases the asset back to the seller-lessee.
Table of Contents
IFRS 16 Sale and Leaseback – Accounting
| ‘Accounting’ of IFRS 16 Sale and Leaseback Transactions depends on whether the transfer of an underlying asset from seller-lessee to buyer-lessor is a sale under IFRS 15? |
How to CONCLUDE whether the transfer of an underlying asset from seller-lessee to buyer-lessor is a ‘Sale’ under IFRS 15?
| Evaluate the Leaseback Transaction from the Perspective of Buyer-Lessor |
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| (Ref. Next Table) |
| If the leaseback is ‘Finance Lease‘ from the perspective of buyer-lessor: – Transfer of an asset from seller-lessee to buyer-lessor is NOT a sale under IFRS 15. | If the leaseback is ‘Operating Lease’ from the perspective of the buyer-lessor: – Transfer of an asset from seller-lessee to buyer-lessor is a sale under IFRS 15. |
| Transfer to buyer-lessor is Not Sale | Transfer to buyer-lessor is Sale |
|---|---|
| Seller-Lessee: – Continue to recognize the underlying asset. – Recognize Financial Liability under IFRS 9 for any amount received from buyer-lessor. Buyer-Lessor: – Do NOT recognize the underlying asset. – Recognize Financial Asset under IFRS 9 for any amount paid to the seller-lessee. | Seller-Lessee: – De-recognize the underlying asset. – Apply the Lessee Accounting to the leaseback. (Ref. Next Table) Buyer-Lessor: – Recognize the underlying asset. – Apply the Lessor Accounting to the leaseback. |
1. Accounting Treatment for Seller-Lessee
[Transfer of ‘Underlying Asset‘ from Seller-Lessee to Buyer-Lessor is a Sale Under IFRS 15]
| Leaseback Accounted for Under IFRS 16 (a) Recognize lease liability at present value (PV) of lease payments (b) Recognize the Right of Use (ROU) asset as a proportion of the carrying amount of asset retained by seller-lessee: [ROU Asset = Carrying Amount of Asset * PV of Lease Payments/FV of Asset] (c) Recognize sale at fair value (d) Recognize gain/loss that relates to rights transferred to buyer-lessor [Gain/Loss = (FV-Carrying Amount of Asset) * (FV-PV of Lease Payment)/FV of Asset] If Sale Proceeds > Fair Value difference being accounted for as ‘Additional Financing‘ provided by buyer-lessor to seller-lessee. If Sale Proceeds < Fair Value difference being accounted for as ‘Prepayment of Lease Payments‘. | Leaseback Accounted for as: – Short Term Lease; OR – Low-Value Asset (a) Recognize any gain/loss as a difference between sale proceed and carrying amount of underlying asset. (b) Recognize lease payments as an expense on Straight-Line Basis (or another systematic basis) over the lease term. |
Synopsis
In IFRS 16 Sale and Leaseback Transaction, an entity sells an asset to a third party and then immediately leases it back. Under IFRS 16, such transactions are accounted for based on the principles of control and transfer of the underlying asset. The ‘Seller-Lessee’ recognizes any Profit or Loss (P&L) from the sale only to the extent of the ‘Buyer-Lessor’s rights, and any excess is deferred.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia