Sale and Leaseback Transactions (IFRS 16)
A sale and leaseback transaction involves the transfer of an asset by an entity (the seller-lessee) to another entity (the buyer-lessor) and the leaseback of the same asset by the seller-lessee. Because IFRS 16 requires lessees to recognise most leases on the balance sheet (i.e., all leases except for leases of low-value assets and short-term leases depending on the lessee’s accounting policy election), sale and leaseback transactions no longer provide lessees with a source of off-balance sheet financing. Another key change is that both the seller-lessee and the buyer-lessor are required to apply IFRS 15 to determine whether to account for a sale and leaseback transaction as a sale and purchase of an asset
An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset
Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset.
The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:
(a) Using the asset to produce goods or provide services (including public services);
(b) Using the asset to enhance the value of other assets;
(c) Using the asset to settle liabilities or reduce expenses;
(d) Selling or exchanging the asset;
(e) Pledging the asset to secure a loan; and
(f) Holding the asset.
When evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset.
Existence of a leaseback, in isolation, does not preclude a sale. This is because a lease is different from the sale or purchase of an underlying asset, as a lease does not transfer control of the underlying asset. Instead, it transfers the right to control the use of the underlying asset for the period of the lease. However, if the seller-lessee has a substantive repurchase option for the underlying asset (i.e., a right to repurchase the asset), no sale has occurred because the buyer-lessor has not obtained control of the asset.
A lessee that has an option to extend a lease for substantially all of the remaining economic life of the underlying asset is, economically, in a similar position to a lessee that has an option to purchase the underlying asset. Therefore, when the renewal price is not fair value at the time the renewal option is exercised, the renewal option would prohibit sale accounting
If the transfer of an asset by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale of the asset:
(a) The seller-lessee shall measure 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 retained by the seller-lessee. Accordingly, the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.
(b) The buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in this Standard.
If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the payments for the lease are not at market rates, an entity shall make the following adjustments to measure the sale proceeds at fair value:
(a) Any below-market terms shall be accounted for as a prepayment of lease payments; and
(b) Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the seller-lessee.
The entity shall measure any potential adjustment on the basis of the more readily determinable of:
(a) The difference between the fair value of the consideration for the sale and the fair value of the asset; and
(b) The difference between the present value of the contractual payments for the lease and the present value of payments for the lease at market rates.
Example— Sale and leaseback transaction
An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of $2,000,000. Immediately before the transaction, the building is carried at a cost of $1,000,000. At the same time, Seller-lessee enters into a contract with Buyer-lessor for the right to use the building for 18 years, with annual payments of $120,000 payable at the end of each year. The terms and conditions of the transaction are such that the transfer of the building by Seller-lessee satisfies the requirements for determining when a performance obligation is satisfied in IFRS 15 Revenue from Contracts with Customers. Accordingly, Seller-lessee and Buyer-lessor account for the transaction as a sale and leaseback. This example ignores any initial direct costs.
The fair value of the building at the date of sale is $1,800,000. Because the consideration for the sale of the building is not at fair value Seller-lessee and Buyer-lessor make adjustments to measure the sale proceeds at fair value. The amount of the excess sale price of $200,000 ($2,000,000 — $1,800,000) is recognised as additional financing provided by Buyer-lessor to Seller-lessee.
The interest rate implicit in the lease is 4.5% per annum, which is readily determinable by Seller-lessee. The present value of the annual payments (18 payments of $120,000, discounted at 4.5% per annum) amounts to $1,459,200, of which $200,000 relates to the additional financing and $1,259,200 relates to the lease—corresponding to 18 annual payments of $16,447 and $103,553, respectively.
Buyer-lessor classifies the lease of the building as an operating lease.
At the commencement date, Seller-lessee measures the right-of-use asset arising from the leaseback of the building at the proportion of the previous carrying amount of the building that relates to the right-of-use retained by Seller-lessee, which is $699,555. This is calculated as: $1,000,000 (the carrying amount of the building) ÷ $1,800,000 (the fair value of the building) x $1,259,200 (the discounted lease payments for the 18-year right-of-use asset).
Seller-lessee recognises only the amount of the gain that relates to the rights transferred to Buyer-lessor of $240,355 calculated as follows. The gain on sale of building amounts to $800,000 ($1,800,000 – $1,000,000), of which:
(a) $559,645 ($800,000 ÷ $1,800,000 x $1,259,200) relates to the right to use the building retained by Seller-lessee; and
(b) $240,355 ($800,000 ÷ $1,800,000 x ($1,800,000 - $1,259,200)) relates to the rights transferred to Buyer-lessor.
After the commencement date, Buyer-lessor accounts for the lease by treating $103,553 of the annual payments of $120,000 as lease payments. The remaining $16,447 of annual payments received from Seller-lessee are accounted for as (a) payments received to settle the financial asset of $200,000 and (b) interest revenue.
At the commencement date, Seller-lessee accounts for the transaction as follows.
Right-of-use asset $699,555
Financial liability $1,459,200
Gain on rights transferred $240,355
At the commencement date, Buyer-lessor accounts for the transaction as follows.
Financial asset $200,000 (18 payments of $16,447, discounted at 4.5%)
After the commencement date, Buyer-lessor accounts for the lease by treating $103,553 of the annual payments of $120,000 as lease payments. The remaining $16,447 of annual payments received from Seller-lessee are accounted for as (a) payments received to settle the financial asset of $200,000 and (b) interest revenue
Transfer of the asset is not a sale
If the transfer of an asset by the seller-lessee does not satisfy the requirements of IFRS 15 to be accounted for as a sale of the asset:
(a) The seller-lessee shall continue to recognise the transferred asset and shall recognise a financial liability equal to the transfer proceeds. It shall account for the financial liability applying IFRS 9.
(b) The buyer-lessor shall not recognise the transferred asset and shall recognise a financial asset equal to the transfer proceeds. It shall account for the financial asset applying IFRS 9.