Fleet leases and sale-leaseback

Nearly all vehicle, trailer and equipment leases used by carriers must be brought on-balance-sheet as right-of-use assets and lease liabilities, materially increasing reported assets and debt-like liabilities and changing EBITDA (lease expense is replaced by depreciation and interest). Sale-and-leaseback transactions additionally require a specific sale test; getting it wrong can overstate an immediate gain and understate liabilities used by lenders to assess leverage.

Does the contract convey the right to control the use of a specific, identified vehicle, trailer, or vessel for a period of time, or could the supplier substitute a different asset at will? For sale-and-leaseback transactions, does the transfer of the vehicles meet IFRS 15's definition of a sale (has control genuinely passed to the buyer-lessor, or is this in substance a financing arrangement)? Has any short-term or low-value exemption been applied appropriately?

1) Identify whether the contract conveys the right to control use of an identified vehicle/trailer/vessel for a period (an identified asset plus the right to direct its use and obtain substantially all economic benefits). 2) Check for short-term (≤12 months) or low-value asset exemptions that permit off-balance-sheet expensing. 3) At commencement, recognize a right-of-use asset and lease liability for all other leases. 4) For sale-leaseback transactions, first test under IFRS 15 whether a sale has actually occurred (control transferred to the buyer-lessor). 5) If a sale occurred, recognize a right-of-use asset for the retained right of use and recognize only the portion of gain/loss relating to the rights transferred to the buyer-lessor; if no sale occurred, account for the transaction as a financing arrangement (retain the asset, recognize a financial liability for proceeds received).

Measure the lease liability at the present value of lease payments discounted at the rate implicit in the lease, or the lessee's incremental borrowing rate if the implicit rate is not readily determinable; measure the right-of-use asset at the lease liability plus initial direct costs, prepayments, and estimated restoration costs, less incentives. For a qualifying sale-leaseback, measure the retained right-of-use asset as a proportion of the previous carrying amount relating to the right retained, and recognize only the gain/loss relating to the rights transferred.

Disclose: (1) right-of-use assets by class of underlying asset (trucks, trailers, vessels); (2) lease liabilities with a maturity analysis; (3) the incremental borrowing rate approach used; (4) short-term/low-value lease expenses excluded from the balance sheet; (5) the nature, terms, and gain/loss recognized for significant sale-leaseback arrangements, including retained rights of use.

• Treating short-haul rental trucks as automatically off-balance-sheet without properly checking the low-value/short-term exemption conditions (e.g. renewal options that extend the term beyond 12 months)
• recognizing the full sale-leaseback gain immediately when control of the asset has not genuinely transferred to the buyer-lessor
• using a generic incremental borrowing rate not reflective of the entity'
• s actual fleet-financing terms and tenor
• omitting variable/index-linked lease payments that are in-substance fixed from the liability measurement.