Sale and leaseback as buyer-lessor: asset or financial asset · IFRS 16

In plain words

In a sale-and-leaseback, a company sells its asset to a leasing company and rents it back. If the company must buy the asset back, or can buy it back at a set price rather than at its market value, it usually never really sold it. The leasing company then simply records a loan to the company, with the asset acting as security. It earns interest on that loan rather than lease income.

Why it matters

Sale-and-leaseback is a core product for leasing companies in the region: a business sells its trucks, machinery or building to the leasing company to raise cash and leases them back, often with an option or obligation to buy them back at the end. The buyer-lessor must first decide, using the IFRS 15 control requirements, whether it has really bought the asset. If the seller-lessee keeps control (most clearly where it has a substantive right or obligation to repurchase the asset), there is no purchase and no lease: the leasing company recognises a financial asset equal to the amount paid, accounted for under IFRS 9 as financing. That changes the line item, the impairment approach (the lease receivable simplified approach is not available), the SPPI assessment and the disclosures.

Diagnostic questions

Does the seller-lessee have an option to repurchase the asset (at a fixed price, a nominal price or a price other than fair value at exercise), or an obligation to repurchase it, or does the leasing company have a right to require repurchase? Would the leaseback, viewed alone, transfer substantially all of the remaining risks and rewards back to the seller-lessee (term for most of the remaining economic life, payments recovering the full purchase price plus return)? Did the seller-lessee obtain control of the asset before transferring it, or is the leasing company buying from a supplier with the 'seller' only arranging the deal? Is the purchase price at fair value, or are there off-market terms? If the transfer is not a sale, is the resulting financial asset assessed for SPPI and business model and impaired under the general approach?

Recognition

Confirm that the transaction is a sale and leaseback: the seller-lessee must control the asset before it is transferred to the leasing company; if it never obtains control (for example the leasing company buys directly from the manufacturer), the transaction is a lease only, not a sale and leaseback.
Apply the IFRS 15 requirements on satisfaction of a performance obligation to decide whether the transfer is a sale. A repurchase right or obligation held by the seller-lessee (a forward or call option) generally means control has not passed, so the transfer is not a sale.
If the transfer is not a sale, the buyer-lessor does not recognise the transferred asset; it recognises a financial asset equal to the transfer proceeds paid, accounted for under IFRS
4. Classify that financial asset: usually amortised cost if the payments are solely principal and interest and it is held to collect; impair it under the IFRS 9 general approach (the lease receivable policy choice does not apply because it is not a lease receivable).
If the transfer is a sale, account for the purchase of the asset under the applicable Standards and for the leaseback under the lessor requirements of IFRS 16 (classifying it as finance or operating as in BANK-081); adjust for off-market terms, treating a below-market price as a prepayment of lease payments and an above-market price as additional financing provided to the seller-lessee.
Record legal title and any registration in the company's name as security only; title does not drive recognition.

Measurement

Failed sale: the financial asset is initially measured at fair value plus transaction costs, which normally equals the cash paid; subsequently at amortised cost using the effective interest rate implied by the 'lease' instalments and any repurchase price, with income presented as interest or financing income rather than lease income. ECL under the general approach, with the transferred asset (legally owned by the leasing company) treated as collateral in loss-given-default estimates. Successful sale: asset recognised at cost (adjusted for off-market terms), then either derecognised into a net investment in a finance lease or held and depreciated under an operating lease.

Presentation & disclosure

Disclose: (1) the accounting policy for sale-and-leaseback transactions and the criteria used to decide whether a transfer is a sale; (2) the carrying amount of financial assets arising from sale-and-leaseback transactions that did not qualify as sales, presented separately from lease receivables where material; (3) the significant judgments made, especially on repurchase options and leasebacks covering most of the asset's life; (4) for failed sales, the IFRS 7 credit risk disclosures, including collateral held; (5) for qualifying sales, the IFRS 16 lessor disclosures for the leaseback.

Common mistakes

Booking every sale-and-leaseback as a finance lease receivable because the product is called leasing
recognising the asset in property and equipment because the leasing company holds title, when the seller-lessee has a repurchase option
applying the lease receivable simplified ECL approach to a failed-sale financial asset
presenting income as lease income and including the balances in the IFRS 16 maturity analysis
ignoring off-market pricing when the purchase price is above the asset's fair value
failing to check whether the seller-lessee ever controlled the asset

Simple example

Al-Wafa Leasing buys a fleet of 50 trucks from a transport company in Riyadh for SAR 10,000,000 (their fair value) and leases them back for 5 years at annual payments in arrears. The transport company may buy the trucks back for SAR 1 at the end. Because of this repurchase option, control does not pass to Al-Wafa and the transfer is not a sale. The annual instalment is SAR 2,504,565, which gives a return of 8%.
Journal entry at the transaction date:
Dr Financing receivable (sale-and-leaseback, amortised cost) 10,000,000
Cr Bank 10,000,000
Journal entry at the end of year 1:
Dr Bank 2,504,565
Cr Financing income 800,000
Cr Financing receivable 1,704,565
(Income = 10,000,000 x 8%. The trucks are not recognised as Al-Wafa's assets even though they are registered in its name; they are collateral for the receivable. ECL follows the IFRS 9 general approach.)

Professional judgment

The decisive judgments are whether a repurchase feature is substantive (a fair-value repurchase option on a widely available asset may not prevent a sale, while a fixed or nominal price option or an obligation usually does), and how to treat a leaseback that covers substantially all of the asset's remaining life without any repurchase option: many practitioners conclude that control has not passed in that case either, but the analysis must be done on the facts. Judgment is also needed on whether the seller-lessee controlled the asset before transfer when it had signed a purchase agreement with a supplier, and on fair value where the purchase price is negotiated as a financing amount rather than an asset price.

Source basis

IFRS 16 · Leases

Paragraph references

IFRS 16.98–99IFRS 16.100(b)IFRS 16.101–102IFRS 16.103IFRS 16.B45–B47

Verified against the official standard texts used in the IFRS Expert skill.

IFRS 16 Leases

Issued: 13 January 2016 · Effective: 1 January 2019

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Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.