Deep Dive into Sale and Leaseback Transactions under IFRS 16 with Practical Examples
- Nhung Nguyen
- Jun 15
- 5 min read
Introduction
Sale and leaseback transactions have long been used by businesses as a financing tool to unlock cash tied up in assets while retaining the right to continue using those assets.
Common examples include:
Manufacturing companies selling factories and leasing them back
Airlines selling aircraft and leasing them back
Retailers selling store properties and leasing them back
Logistics companies selling warehouses and leasing them back
Although these arrangements can improve liquidity and capital management, they also create accounting complexities.
To address these complexities, IFRS 16 Leases introduced detailed guidance on how to account for sale and leaseback transactions.
This article provides a comprehensive explanation of the IFRS 16 requirements, accounting treatments, journal entries, and practical examples.
What is a Sale and Leaseback Transaction?
A sale and leaseback transaction occurs when:
Step 1
An entity sells an asset to another party.
Step 2
The seller immediately leases the same asset back from the buyer.
The seller receives cash proceeds while retaining the right to use the asset.
Example
A company owns a warehouse with a carrying amount of $1,000,000.
The warehouse is sold for $1,500,000.
Immediately after the sale, the company leases the warehouse back for 10 years.
The company:
Receives cash of $1,500,000
Continues using the warehouse
Pays lease rentals over the lease term
Why Do Companies Enter into Sale and Leaseback Transactions?
Common reasons include:
Improve Liquidity
Convert fixed assets into cash.
Raise Capital
Obtain financing without traditional borrowing.
Improve Return on Assets
Reduce owned assets while maintaining operations.
Operational Flexibility
Retain usage rights without ownership responsibilities.
IFRS 16 Core Principle
The accounting treatment depends on one crucial question:
Does the transfer qualify as a sale under IFRS 15 Revenue from Contracts with Customers?
This is the first and most important assessment.
Step 1: Determine Whether a Sale Has Occurred
IFRS 16 requires the seller-lessee to assess whether the transfer satisfies IFRS 15.
If the Transfer Qualifies as a Sale
Apply sale and leaseback accounting.
If the Transfer Does Not Qualify as a Sale
Treat the transaction as a financing arrangement.
No sale is recognized.
Decision Framework
Question | Treatment |
Transfer qualifies as sale? | Apply sale and leaseback accounting |
Transfer does not qualify as sale? | Treat as financing transaction |
Scenario 1: Transfer Qualifies as a Sale
When a genuine sale occurs:
Seller-Lessee Must
Derecognize the asset sold
Recognize a Right-of-Use (ROU) asset
Recognize a lease liability
Recognize only the gain relating to rights transferred
This last requirement is often misunderstood.
Why Isn't the Entire Gain Recognized?
After the sale, the seller-lessee still retains a right to use part of the asset through the lease.
Therefore:
Part of the asset has been transferred
Part of the asset remains controlled through the lease
Only the gain attributable to the transferred rights is recognized immediately.
Practical Example 1: Sale Qualifies Under IFRS 15
Facts
Company A owns a building.
Carrying amount: $1,000,000
Fair value: $1,500,000
Selling price: $1,500,000
Leaseback period: 10 years
Present value of lease payments: $600,000
Step 1: Calculate Total Gain
Sale proceeds = $1,500,000
Less carrying amount = $1,000,000
Total gain = $500,000
Step 2: Determine Portion Retained
Rights retained:
PV of lease payments / Fair value
= $600,000 / $1,500,000
= 40%
Rights transferred:
100% − 40%
= 60%
Step 3: Recognize Gain on Rights Transferred
Recognizable gain:
$500,000 × 60%
= $300,000
Deferred gain:
$500,000 × 40%
= $200,000
The deferred portion becomes embedded within the ROU asset measurement.
Initial Accounting Entries
Derecognition of Building
Carrying amount removed:
$1,000,000
Recognition
Right-of-Use Asset
$400,000
(40% × $1,000,000)
Lease Liability
$600,000
(Present value of lease payments)
Gain
$300,000
Journal Entry
Dr Cash .................................. $1,500,000
Dr Right-of-Use Asset ............ $400,000
Cr Building ................................ $1,000,000
Cr Lease Liability ..................... $600,000
Cr Gain on Sale ........................ $300,000
Understanding the ROU Asset Calculation
A common misconception is:
ROU Asset = Lease Liability
This is incorrect for sale and leaseback transactions.
Under IFRS 16:
ROU Asset reflects the proportion of the previous carrying amount retained.
Formula:
ROU Asset =
Previous Carrying Amount × Rights Retained
Scenario 2: Sale Price Above Fair Value
Sometimes parties agree on a selling price above market value.
Example:
Fair Value = $1,500,000
Selling Price = $1,700,000
Excess = $200,000
IFRS 16 Treatment
The excess amount is not considered gain.
Instead, it is treated as additional financing provided by the buyer-lessor.
Recognized gain is calculated using fair value.
Practical Example 2
Facts
Carrying Amount = $1,000,000
Fair Value = $1,500,000
Selling Price = $1,700,000
Excess Price = $200,000
PV of Lease Payments = $600,000
Calculation
Gain based on fair value:
$1,500,000 − $1,000,000
= $500,000
Recognizable gain:
$500,000 × 60%
= $300,000
The additional $200,000 is treated as financing.
Scenario 3: Sale Price Below Fair Value
Suppose:
Fair Value = $1,500,000
Selling Price = $1,300,000
Discount = $200,000
IFRS 16 Assessment
Determine whether the discount reflects:
Market Conditions
or
Below-Market Lease Payments
If related to lease payments:
Adjust lease payments to market terms before calculations.
Scenario 4: Transfer Does Not Qualify as a Sale
This is where many practitioners struggle.
Example
A company transfers an asset but retains control through:
Repurchase options
Forward purchase agreements
Other arrangements preventing transfer of control
Under IFRS 15:
No sale has occurred.
Accounting Consequences
Seller-Lessee
Continues recognizing the asset.
Recognizes a financial liability.
Buyer-Lessor
Recognizes a financial asset.
Does not recognize the purchased asset.
Practical Example 3
Facts
Carrying amount of equipment:
$1,000,000
Cash received:
$1,300,000
Repurchase agreement exists.
Transfer fails IFRS 15.
Accounting
Seller-Lessee
Dr Cash .............................. $1,300,000
Cr Financial Liability ........ $1,300,000
No gain recognized.
Asset remains on balance sheet.
Comparison: Sale vs Financing
Item | Sale Achieved | Sale Not Achieved |
Asset Derecognized | Yes | No |
Gain Recognized | Partial | None |
ROU Asset Recognized | Yes | No |
Lease Liability Recognized | Yes | No |
Financial Liability | No | Yes |
Subsequent Accounting
After initial recognition:
Right-of-Use Asset
Depreciated over:
Lease term
Useful life (if ownership transfers)
Lease Liability
Measured using:
Amortized cost method
Interest expense recognized periodically.
Disclosure Requirements
Entities must disclose:
Sale and Leaseback Gains
Amount recognized during the year.
Lease Liabilities
Remaining obligations.
Maturity Analysis
Future cash outflows.
Significant Judgments
Particularly regarding:
Determination of sale
Fair value assessments
Lease term assumptions
Common Mistakes in Practice
Recognizing Entire Gain
Only gain relating to rights transferred should be recognized.
Ignoring IFRS 15 Assessment
Many accountants immediately assume a sale exists.
The IFRS 15 assessment must come first.
Incorrect ROU Asset Calculation
ROU assets are based on retained rights, not lease liability.
Ignoring Off-Market Pricing
Sale price must be compared with fair value.
Misidentifying Financing Arrangements
Repurchase agreements often prevent sale accounting.
IFRS 16 Sale and Leaseback Checklist
✓ Determine whether IFRS 15 sale criteria are met
✓ Compare selling price with fair value
✓ Calculate retained-use percentage
✓ Measure ROU asset correctly
✓ Measure lease liability
✓ Recognize only gain on transferred rights
✓ Assess off-market terms
✓ Consider financing elements
✓ Prepare required disclosures
Real-World Industries Using Sale and Leaseback Structures
Airlines
Aircraft sale and leaseback arrangements.
Retail Chains
Store property monetization.
Logistics Companies
Warehouse sale and leaseback.
Telecommunications
Network infrastructure financing.
Manufacturing
Factory and machinery transactions.
Healthcare
Hospital building monetization.
Conclusion
Sale and leaseback transactions under IFRS 16 are significantly more complex than ordinary lease accounting. The accounting treatment depends first on whether the transfer qualifies as a sale under IFRS 15. When a sale occurs, only the gain related to rights transferred is recognized, while the retained right of use gives rise to a Right-of-Use Asset and Lease Liability.
Understanding the interaction between IFRS 15 and IFRS 16 is essential for ensuring accurate financial reporting. With careful assessment of fair value, retained rights, lease liabilities, and financing elements, organizations can correctly account for sale and leaseback transactions while maintaining compliance with international financial reporting standards.
Resource: Internet
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