IFRS 16 – Sale & Leaseback

In a sale-and-leaseback transaction (‘SALT’), an entity (seller-lessee) sells an asset to another entity (buyer-lessor) who then leases it back to the seller-lessee.

The accounting for a SALT under IFRS 16 is significantly different to that required by IAS 17.

In order to determine the appropriate accounting treatment under IFRS 16, the sale must first be assessed as to whether it qualifies as a sale in accordance with the requirements of IFRS 15.


  • Transfer of the asset is in substance a sale

As a sale has occurred, in the seller-lessee’s books, the carrying amount of the asset must be derecognized.

The seller-lessee recognizes a right-of-use asset measured at the proportion of the previous carrying amount that relates to the right of use retained.

A gain/loss is recognized in the seller-lessee’s financial statements in relation to the rights transferred to the buyer-lessor.

The accounting treatment will depend on whether the consideration received is equal or not to the fair value of the asset (see worked examples below).

The buyer-lessor accounts for the purchase as a normal purchase and for the lease in accordance with IFRS 16.


  • Transfer of the asset is a NOT in substance a sale

The seller-lessee continues to recognize the transferred asset and recognizes a financial liability equal to the transfer proceeds.

The buyer-lessor does not recognize the transferred asset and recognizes a financial asset equal to the transfer proceeds.


Example 1

ABC Ltd has decided to sell its main office building to a third party for $10m and lease it back on a 6-year lease. The current FV of the property is $10m and the carrying value of the asset is $8m. The present value of the lease payments has been calculated as $6m. The transaction constitutes a sale in accordance with IFRS 15.

Solution 1

In this case the IFRS 15 criteria have been met. IFRS 16 therefore requires that, at the start of the lease, ABC Ltd should measure the right-of-use asset arising from the leaseback of the building at the proportion of the previous carrying amount of the building that relates to the right-of-use retained.

This is calculated as carrying amount × PVMLP/FV.

The right of use asset is therefore: $8m × $6m/$10m = $4,8m.*

At the commencement date the lessee accounts for the transaction as follows:

DR CASH $10m

DR RIGHT-OF-USE ASSET $4,8m*

                                                                CR BUILDING $8m

                                                                CR FINANCIAL LIABILITY $6m

                                                                CR P/L (b) $0,8m


Example 2

We will use an identical scenario, but in this case the selling price will be lower compared to FV.

ABC Ltd has decided to sell its main office building to a third party for $9m and lease it back on a 6-year lease. The current FV of the property is $10m and the carrying value of the asset is $8m. The present value of the lease payments has been calculated as $6m. The transaction constitutes a sale in accordance with IFRS 15.

Solution 2

Here the sales price is below fair value. The difference is accounted for as a prepayment of lease payments and so is added to the right-of-use asset as per the normal IFRS 16 treatment for initial measurement of a right-of-use asset.

The right of use asset is therefore: ($8m × $6m/$10m) + ($10m – $9m) = $5,8m.*

At the commencement date the lessee accounts for the transaction as follows:

DR CASH $9m

DR RIGHT-OF-USE ASSET $5,8m*

                                                                CR BUILDING $8m

                                                                CR FINANCIAL LIABILITY $6m

                                                                CR P/L (b) $0,8m


Example 3

For the third and final example, the selling price will be higher compared to FV.

ABC Ltd has decided to sell its main office building to a third party for $12m and lease it back on a 6-year lease. The current FV of the property is $10m and the carrying value of the asset is $8m. The present value of the lease payments has been calculated as $6m. The transaction constitutes a sale in accordance with IFRS 15.

Solution 3

Here the sales price would be above fair value. IFRS 16 states that the excess over fair value should be accounted for as additional finance provided by the lessor, so the $2 million ($12m – $10m) above the fair value would be treated as an additional liability.

The lease liability is originally recorded at the present value of lease payments. This amount is then split between:

  • the additional financing (the difference) which is in substance a loan, and
  • the present value of lease payments at market rates (the balance).

 The PVMLP is $6m, of which $2m relates to financing and $4m relates to the lease.

The right of use asset is therefore: $8m × $4m/$10m= $3,2m.*

At the commencement date the lessee accounts for the transaction as follows:

DR CASH $12m

DR RIGHT-OF-USE ASSET $3,2m*

                                                                CR BUILDING $8m

                                                                CR FINANCIAL LIABILITY $6m

                                                                CR P/L (b) $1,2m


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