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

As shown above, in a sale and leaseback transaction, the device, owned by the seller, remains on the seller's premises 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 makes it possible for the seller-lessee to right away get liquid funds from the buyer-lessor from selling the asset, while keeping the right to utilize the asset. In addition, if the fair value of the property is higher than its book value, getting in into a sale and leaseback deal can lead to an accounting revenue being recognised by the seller-lessee.

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

Treatment under IAS 17

Under IAS 17, the seller-lessee postpones the gain on the sale of the transaction if the resulting lease is categorized as a finance lease. If the resulting lease is classified as an operating lease, however, the gain is identified completely if the proceeds of the sale amount to the asset's fair value; otherwise the gain is postponed and spread over the lease term.

Treatment under IFRS 16

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

- Derecognise the possession and use lessee accounting requirements

- Measure the right-of-use asset as the retained part of the previous bring value

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


- Apply lessor accounting requirements to the possession acquired


- Continue acknowledgment of the possession

- Amounts gotten are identified as a monetary liability under IFRS 9 Financial Instruments


- The possession acquired is not acknowledged

- Amounts to be paid by seller-lessee are recognised as a monetary asset under IFRS 9 Financial Instruments


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

If the sale side of the deal qualifies as a sale under IFRS 15, it is needed to think about whether the list prices as mentioned in the agreement amounts to the possession's fair value.

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

IFRS 16 needs the earnings or loss on the sale side of the transaction from the seller-lessee's point of view (and initial measurement of the property bought from the buyer-lessor's viewpoint) to be identified by referral to the fair worth of the property, not the mentioned contractual price.

Seller-lessees for that reason need to figure out the reasonable worth of the possession in order to ensure they identify the appropriate earnings or loss on sale (as do buyer-lessors for the purposes of accounting for the expense of the possession), instead of presuming the property's reasonable worth equates to the stated legal sales cost.

BDO Comment:

There is uncertainty as to which of the requirements in IFRS a seller/lessee must follow in figuring out the fair worth of an asset topic to a sale and leaseback transaction.

While IFRS 13 Fair Value Measurement is typically the requirement that offers guidance on fair worth, IFRS 13.6( b) scopes out renting transactions accounted for in accordance with IFRS 16. Fair worth is specified in IFRS 16 itself, nevertheless, the meaning of reasonable value in IFRS 16, which is different to the definition of reasonable value in IFRS 13, is prefaced with 'for the purpose of applying the lessor accounting requirements in this Standard ...'. Therefore, it is unclear which definition of reasonable value a seller/lessee ought to apply when applying the sale and leaseback assistance in IFRS 16.

In our view, because IFRS 16 describes IFRS 15 Revenue from Contracts with Customers in determining whether the transfer of a property is represented as a sale, and IFRS 15 is consisted of in the scope of IFRS 13 for fair worth measurement, a lessee ought to describe IFRS 13 in applying the sale and leaseback guidance in IFRS 16

If it is determined that the fair worth of the possession is less than, or greater than, the legal sales cost, the distinction is represented by the lessee as an extra loaning or a prepayment, respectively. Similarly, the lessor accounts for the distinction as rents receivable, or delayed rental earnings, respectively (if the leaseback is classified as an operating lease) or an adjustment to the financing lease debtor (if the leaseback is classified as a financing lease). This is illustrated in the table listed below:

Fair value of property is < contractual prices

Fair worth of asset moved is $75,000.

Contractual sales price is $100,000.


Difference accounted for as an extra loaning

Difference accounted for as extra rent receivable

Fair value of property is > legal list prices

Example:

Fair worth of property moved is $100,000.

Contractual prices is $75,000.


Difference accounted for as an additional prepayment

Difference represented as deferred rental earnings

* Deferred income for running lease and Finance lease debtor for financing lease

In many cases, when identifying the revenue or loss on the sale of the property, it may be easier to compare the contractual leaseback rentals to market rentals (rather than the legal sales rate to the reasonable value of the rented possession) and IFRS 16 allows this approach to be taken.

Further problem in figuring out profit or loss on disposal

Finally, as a further complication in the computation of the lessee's profit or loss on disposal, it requires to be born in mind that a seller-lessee does not move control of the whole property to the buyer-lessor, because it continues to manage the very same possession throughout the leaseback period. The seller-lessee is just losing control of the possession subsequent to the leaseback duration.

In May 2019 Accounting News, we will include a comprehensive example to show this idea.

Concluding thoughts

Sale and leaseback deals make it possible for seller-lessees to free up the funds connected with ownership of a property, while still having the ability to utilise that asset. For that reason, sale and leaseback deals are typical in a number of industries.