In a sale and leaseback transaction, an entity (the seller-lessee) offers a possession to another entity (the buyer-lessor), which then leases the asset back to the seller-lessee.

As shown above, in a sale and leaseback transaction, the maker, owned by the seller, stays on the seller's facilities at all times. The seller receives a swelling sum funding quantity from the buyer on entering into the sale and leaseback transaction, and the seller (who is now the lessee), makes regular payments to the buyer (who is now the lessor).

Entering into a sale and leaseback deal enables the seller-lessee to immediately receive liquid funds from the buyer-lessor from selling the possession, while keeping the right to utilize the property. In addition, if the reasonable value of the property is greater than its book worth, getting in into a sale and leaseback deal can result in an accounting profit being recognised by the seller-lessee.

Accounting for a sale and leaseback deal under IFRS 16 Leases varies considerably to accounting for a sale and leaseback transaction under IAS 17 Leases.

Treatment under IAS 17

Under IAS 17, the seller-lessee delays the gain on the sale of the transaction if the resulting lease is categorized as a financing lease. If the resulting lease is categorized as an operating lease, nevertheless, the gain is recognised in full if the profits of the sale amount to the asset's reasonable value; otherwise the gain is deferred and topped the lease term.

Treatment under IFRS 16

In order to identify the proper accounting treatment under IFRS 16, the sale must first be assessed to determine whether it qualifies as a sale in accordance with the requirements of IFRS 15 Revenue from Contracts with Customers. The needed accounting treatments are laid out in the table below:

- Derecognise the asset and apply lessee accounting requirements

- Measure the right-of-use possession as the maintained part of the previous bring worth

- Recognise a gain/loss on the rights moved to the lessor


- Apply lessor accounting requirements to the possession bought


- Continue recognition of the asset

- Amounts received are acknowledged as a monetary liability under IFRS 9 Financial Instruments


- The property purchased is not acknowledged

- Total up to be paid by seller-lessee are identified as a monetary property under IFRS 9 Financial Instruments


Sale side of the transaction certifies as a sale under IFRS 15

If the sale side of the deal certifies as a sale under IFRS 15, it is necessary to think about whether the sales rate as mentioned in the agreement amounts to the asset's reasonable value.

In an arm's length transaction, it is highly likely that the overall factor to consider for the sale and leaseback will be on market terms. However, this does not avoid the consideration gotten on the sale side of the agreement being off-market, with compensating off-market lease payments being made on the leaseback side of the deal.

IFRS 16 needs the profit or loss on the sale side of the deal from the seller-lessee's viewpoint (and initial measurement of the property bought from the buyer-lessor's perspective) to be figured out by referral to the reasonable value of the possession, not the specified legal sale rate.

Seller-lessees for that reason need to determine the fair value of the property in order to guarantee they identify the appropriate earnings or loss on sale (as do buyer-lessors for the purposes of accounting for the cost of the asset), instead of presuming the asset's reasonable value equals the stated contractual prices.

BDO Comment:

There is uncertainty regarding which of the requirements in IFRS a seller/lessee ought to follow in identifying the reasonable worth of a property subject to a sale and leaseback deal.

While IFRS 13 Fair Value Measurement is usually the requirement that provides guidance on reasonable value, IFRS 13.6( b) scopes out leasing transactions accounted for in accordance with IFRS 16. Fair worth is defined in IFRS 16 itself, nevertheless, the meaning of reasonable value in IFRS 16, which is different to the meaning of fair worth in IFRS 13, is prefaced with 'for the function of using the lessor accounting requirements in this Standard ...'. Therefore, it is unclear which meaning of reasonable value a seller/lessee need to apply when applying the sale and leaseback guidance in IFRS 16.

In our view, given that IFRS 16 refers to IFRS 15 Revenue from Contracts with Customers in determining whether the transfer of a property is accounted for as a sale, and IFRS 15 is included in the scope of IFRS 13 for reasonable value measurement, a lessee ought to describe IFRS 13 in applying the sale and leaseback assistance in IFRS 16

If it is determined that the reasonable worth of the possession is less than, or higher than, the contractual list prices, the difference is accounted for by the lessee as an extra loaning or a prepayment, respectively. Similarly, the lessor accounts for the distinction as rents receivable, or postponed rental earnings, respectively (if the leaseback is classified as an operating lease) or a modification to the finance lease debtor (if the leaseback is categorized as a finance lease). This is highlighted in the table below:

Fair worth of possession is < legal prices

Fair worth of asset transferred is $75,000.

Contractual sales rate is $100,000.


Difference accounted for as an extra loaning

Difference represented as additional rent receivable

Fair worth of asset is > legal prices

Example:

Fair worth of property moved is $100,000.

Contractual sales rate is $75,000.


Difference represented as an extra prepayment

Difference accounted for as deferred rental income

* Deferred earnings for operating lease and Finance lease debtor for financing lease

Sometimes, when figuring out the earnings or loss on the sale of the property, it might be much easier to compare the legal leaseback rentals to market leasings (instead of the contractual sales cost to the fair worth of the rented possession) and IFRS 16 permits this method to be taken.

Further problem in figuring out earnings or loss on disposal

Finally, as an additional problem in the estimation of the lessee's revenue or loss on disposal, it needs to be kept in mind that a seller-lessee does not move control of the entire possession to the buyer-lessor, because it continues to control the exact same property throughout the leaseback duration. The seller-lessee is only losing control of the property subsequent to the leaseback period.

In May 2019 Accounting News, we will include a detailed example to highlight this principle.

Concluding thoughts

Sale and leaseback transactions enable seller-lessees to maximize the funds connected with ownership of an asset, while still having the ability to use that possession. Because of that, sale and leaseback deals are common in a number of markets.