Sale and leaseback

Raising cash by selling a facility and leasing it back only produces a partial gain (for rights transferred), and if the transfer fails the sale test it is accounted for as a loan, not a sale. Overstating the gain inflates current-period profit and misrepresents the transaction as an asset disposal rather than what is often, in substance, secured financing - misleading lenders and investors about true leverage and the sustainability of reported earnings.

Does the transfer of the facility qualify as a sale under the control-transfer criteria, or does a repurchase option or continuing involvement clause prevent sale accounting? If it is a sale, is the gain recognized limited only to the proportion of rights transferred (not the full difference between sale price and carrying amount)? Is the leaseback priced at market rates, with any off-market element adjusted as additional financing or prepaid rent?

1. Determine whether the transfer of the underlying asset qualifies as a sale under the revenue recognition control-transfer criteria (treat the buyer-lessor as a customer) - a repurchase option that would require the seller to repurchase, or gives it the ability to, usually prevents sale accounting.
2. If it is not a sale (control has not transferred), do not derecognize the asset - account for the transaction as a financing: keep the asset on the balance sheet and recognize a financial liability equal to proceeds received.
3. If it is a sale, derecognize the underlying asset in full, but do not recognize the full gain or loss.
4. Recognize a right-of-use asset for the portion of the previous carrying amount that relates to the right retained through the leaseback.
5. Recognize a gain or loss only for the rights transferred to the buyer-lessor (i.e. the portion NOT retained via the leaseback).
6. Check whether the sale price and/or the lease payments are at market terms; if not, adjust the accounting: any excess of sale proceeds over fair value is additional financing, and any shortfall is a prepayment of lease payments.
7. Reassess the classification and gain calculation if the leaseback terms are amended, and obtain specialist technical review given the complexity of combining the sale test with the partial gain mechanics.

Measurement basis: on sale, the underlying asset is derecognized at its full previous carrying amount; the retained right-of-use asset is measured as the proportion of that previous carrying amount relating to the right retained (not at fair value); the gain/loss recognized relates only to the rights transferred. Included in the leaseback liability: the same components as any other lease liability (fixed payments, index-linked variable payments, etc.), discounted at the rate implicit in the leaseback or the incremental borrowing rate. Excluded: any portion of proceeds or payments that are off-market, which are reclassified as financing or prepayment. Subsequent measurement / remeasurement triggers: the ROU asset is depreciated over the leaseback term as normal; the liability is remeasured for the same triggers as any lease (term reassessment, index changes, modifications); a subsequent impairment indicator on the ROU asset triggers an IAS 36 test like any other right-of-use asset.

Description of the transaction structure (asset sold, buyer-lessor, leaseback term, any repurchase or renewal options); basis for concluding the transfer qualified (or did not qualify) as a sale; gain or loss recognized and how it was calculated (rights-transferred proportion); right-of-use asset and lease liability recognized from the leaseback presented consistently with other IFRS 16 balances; any off-market terms identified and how they were adjusted (additional financing or prepayment).

• Recognizing the full gain on disposal as if the asset were sold outright, ignoring that a portion of the rights was retained via the leaseback
• ignoring repurchase options that in substance make the transaction a financing rather than a sale
• failing to test whether the sale price and lease payments are at market terms, missing an embedded financing element
• treating the leaseback ROU asset at its full fair value rather than the proportion of previous carrying amount relating to rights retained
• not obtaining specialist review despite the technical complexity, leading to inconsistent treatment across similar transactions.