Sale and leaseback accounting
The introduction of IFRS 16 ‘Leases’ addressed many of the shortcomings of its predecessor. The result is a robust, fit for purpose framework that delivers a level of transparency and insight that was previously unavailable to investors.
Our ‘Insights into IFRS 16’ series summaries key areas of the Standard and aims to demystify those key requirements that are challenging to apply in practice. This article considers accounting for sale and leaseback arrangements.
A sale and leaseback transaction is a common arrangement and one that many entities may use to manage and finance their assets. IFRS 16 includes specific requirements for sale and leaseback accounting. A sale and leaseback transaction is one where an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) for consideration and leases that asset back from the buyer-lessor.
When a seller-lessee has undertaken a sale and lease back transaction with a buyer-lessor, both the seller-lessee and the buyer-lessor must first determine whether the transfer qualifies as a sale. This determination is based on the requirements for satisfying a performance obligation in IFRS 15 ‘Revenue from Contracts with Customers’.
The accounting treatment will vary depending on whether or not the transfer qualifies as a sale. This is described opposite.
