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 illustrated 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 sum financing amount from the purchaser on participating in the sale and leaseback transaction, and the seller (who is now the lessee), makes routine payments to the buyer (who is now the lessor).

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

Accounting for a sale and leaseback deal under IFRS 16 Leases differs substantially to representing a sale and leaseback deal under IAS 17 Leases.

Treatment under IAS 17

Under IAS 17, the seller-lessee defers the gain on the sale of the transaction if the resulting lease is categorized as a finance lease. If the resulting lease is categorized as an operating lease, nevertheless, the gain is identified in full if the profits of the sale are equal 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 determine the suitable accounting treatment under IFRS 16, the sale should 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 detailed in the table listed below:

- Derecognise the property and apply lessee accounting requirements

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

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


- Apply lessor accounting requirements to the property acquired


- Continue acknowledgment of the property

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


- The possession acquired is not identified

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


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

If the sale side of the transaction qualifies as a sale under IFRS 15, it is required to think about whether the list prices as specified in the contract amounts to the asset's reasonable worth.

In an arm's length deal, it is extremely likely that the total factor to consider for the sale and leaseback will be on market terms. However, this does not prevent the factor to consider received 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 requires the earnings or loss on the sale side of the transaction from the seller-lessee's perspective (and initial measurement of the asset acquired from the buyer-lessor's perspective) to be figured out by recommendation to the reasonable value of the property, not the specified contractual sale price.

Seller-lessees therefore require to figure out the reasonable value of the asset in order to guarantee they identify the right revenue or loss on sale (as do buyer-lessors for the functions of accounting for the cost of the property), instead of presuming the asset's reasonable worth equates to the stated legal sales price.

BDO Comment:

There is uncertainty as to which of the requirements in IFRS a seller/lessee should follow in figuring out the reasonable value of a possession subject to a sale and leaseback deal.

While IFRS 13 Fair Value Measurement is generally the requirement that provides assistance on reasonable value, IFRS 13.6( b) scopes out leasing transactions represented in accordance with IFRS 16. Fair worth is specified in IFRS 16 itself, however, the meaning of fair value in IFRS 16, which is various to the meaning of reasonable worth in IFRS 13, is prefaced with 'for the purpose of applying the lessor accounting requirements in this Standard ...'. Therefore, it is uncertain which definition of fair worth a seller/lessee ought to apply when using the sale and leaseback assistance in IFRS 16.

In our view, considering that IFRS 16 refers to IFRS 15 Revenue from Contracts with Customers in determining whether the transfer of an asset is accounted for as a sale, and IFRS 15 is consisted of in the scope of IFRS 13 for fair value measurement, a lessee needs to refer to IFRS 13 in using the sale and leaseback assistance in IFRS 16

If it is determined that the fair worth of the asset is less than, or higher than, the contractual prices, the difference is represented by the lessee as an extra borrowing or a prepayment, respectively. Similarly, the lessor represent the difference as leas receivable, or postponed rental earnings, respectively (if the leaseback is categorized as an operating lease) or an adjustment to the finance lease debtor (if the leaseback is classified as a financing lease). This is illustrated in the table listed below:

Fair value of asset is < contractual sales rate

Fair worth of possession moved is $75,000.

Contractual list prices is $100,000.


Difference represented as an additional loaning

Difference represented as additional lease receivable

Fair value of property is > contractual sales price

Example:

Fair worth of asset moved is $100,000.

Contractual prices is $75,000.


Difference accounted for as an extra prepayment

Difference accounted for as delayed rental earnings

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

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

Further problem in identifying earnings or loss on disposal

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

In May 2019 Accounting News, we will consist of a detailed example to illustrate this principle.

Concluding thoughts

Sale and leaseback deals enable seller-lessees to free up the funds associated with ownership of a possession, while still having the ability to utilise that property. Because of that, sale and leaseback deals prevail in a variety of markets.