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

As highlighted above, in a sale and leaseback deal, the device, owned by the seller, stays on the seller's properties at all times. The seller gets a lump amount funding amount from the buyer on participating in the sale and leaseback transaction, and the seller (who is now the lessee), makes periodic payments to the buyer (who is now the lessor).

Participating in a sale and leaseback deal allows the seller-lessee to immediately get liquid funds from the buyer-lessor from offering the asset, while retaining the right to use the property. In addition, if the reasonable worth of the possession is higher than its book worth, getting in into a sale and leaseback transaction can lead to an accounting revenue being identified by the seller-lessee.

Accounting for a sale and leaseback transaction under IFRS 16 Leases varies significantly to accounting for a sale and leaseback deal 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 classified as an operating lease, nevertheless, the gain is identified completely if the proceeds of the sale are equivalent to the asset's reasonable worth; otherwise the gain is delayed and spread out over the lease term.

Treatment under IFRS 16

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

- Derecognise the possession and use lessee accounting requirements

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

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


- Apply lessor accounting requirements to the possession purchased


- Continue acknowledgment of the asset

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


- The property acquired is not recognised

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


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

If the sale side of the transaction certifies as a sale under IFRS 15, it is essential to think about whether the sales price as mentioned in the contract is equivalent to the asset's reasonable worth.

In an arm's length deal, it is extremely likely that the overall consideration for the sale and leaseback will be on market terms. However, this does not prevent the consideration 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 profit or loss on the sale side of the transaction from the seller-lessee's perspective (and preliminary measurement of the property acquired from the buyer-lessor's point of view) to be figured out by reference to the fair worth of the asset, not the mentioned contractual price.

Seller-lessees for that reason require to determine the fair worth of the property in order to guarantee they recognise the correct profit or loss on sale (as do buyer-lessors for the functions of accounting for the cost of the asset), instead of presuming the possession's fair worth equates to the stated legal prices.

BDO Comment:

There is uncertainty regarding which of the requirements in IFRS a seller/lessee need to follow in determining the reasonable value of a property subject to a sale and leaseback transaction.

While IFRS 13 Fair Value Measurement is generally the requirement that provides guidance on fair worth, IFRS 13.6( b) scopes out leasing deals accounted for in accordance with IFRS 16. Fair worth is defined in IFRS 16 itself, however, the definition of fair worth in IFRS 16, which is various to the meaning of fair value in IFRS 13, is prefaced with 'for the purpose of using the lessor accounting requirements in this Standard ...'. Therefore, it is uncertain which definition of reasonable value a seller/lessee must use 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 an asset is represented as a sale, and IFRS 15 is consisted of in the scope of IFRS 13 for reasonable worth measurement, a lessee should describe IFRS 13 in using the sale and leaseback assistance in IFRS 16

If it is figured out that the fair worth of the property is less than, or higher than, the contractual sales price, the difference is represented by the lessee as an additional borrowing or a prepayment, respectively. Similarly, the lessor accounts for the difference as rents receivable, or deferred rental income, respectively (if the leaseback is categorized as an operating lease) or an adjustment to the financing lease debtor (if the leaseback is classified as a financing lease). This is shown in the table listed below:

Fair value of possession is < legal prices

Fair worth of property transferred is $75,000.

Contractual prices is $100,000.


Difference represented as an extra loaning

Difference represented as additional lease receivable

Fair worth of possession is > legal sales price

Example:

Fair worth of possession transferred is $100,000.

Contractual list prices is $75,000.


Difference represented as an extra prepayment

Difference represented as postponed rental income

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

In some cases, when figuring out the revenue or loss on the sale of the asset, it might be simpler to compare the legal leaseback leasings to market rentals (instead of the contractual prices to the fair worth of the rented property) and IFRS 16 permits this method to be taken.

Further problem in identifying profit or loss on disposal

Finally, as a further problem in the computation of the lessee's revenue or loss on disposal, it requires to be born in mind that a seller-lessee does not transfer control of the entire possession to the buyer-lessor, since it continues to manage the exact same asset throughout the leaseback duration. The seller-lessee is just losing control of the asset subsequent to the leaseback period.

In May 2019 Accounting News, we will include a detailed example to illustrate this concept.

Concluding thoughts

Sale and leaseback deals make it possible for seller-lessees to maximize the funds related to ownership of a property, while still having the ability to utilise that property. For that factor, sale and leaseback deals prevail in a number of markets.