Sale-and-leaseback of completed investment or owner-occupied property

Sale-and-leaseback is a core capital-recycling tool for regional developers and REITs, and the difference between full gain recognition and the correct proportionate gain can materially inflate reported profit in the disposal period while overstating the seller-lessee's derecognition of leverage; misclassifying a disguised financing as a sale also misstates gearing and liquidity ratios relied on by lenders.

Does the transfer of the asset satisfy the IFRS 15 control transfer criteria to qualify as a sale, rather than being, in substance, a financing or repurchase arrangement? Is only the gain relating to the rights transferred to the buyer-lessor recognized in profit or loss, with the remainder reflected in the retained right-of-use asset? Are the sale price and lease payments at market terms, and if not, has the off-market excess/shortfall been reclassified as additional financing or a prepayment of rent? Has the buyer-lessor's own lease classification (finance versus operating) been separately assessed rather than assumed to mirror the seller-lessee's accounting?

1) Assess whether the transfer of the asset satisfies the IFRS 15 control transfer criteria to be accounted for as a sale (e.g., the buyer obtains control - not merely legal title - and the arrangement is not, in substance, a financing or repurchase agreement).
2) If the transfer does NOT qualify as a sale (e.g., a repurchase option at other than fair value, or the seller retains substantially all risks/rewards indicating financing), account for it as a financing: keep the asset on the seller-lessee's books, continue depreciating it, and recognize the proceeds received as a financial liability.
3) If the transfer DOES qualify as a sale, derecognize the full carrying amount of the asset from the seller-lessee's books.
4) Determine the proportion of the previous carrying amount that relates to the right of use retained through the leaseback (based on the ratio of the present value of leaseback payments to the asset's fair value) and recognize a right-of-use asset at that proportion of the previous carrying amount.
5) Recognize in profit or loss ONLY the gain or loss relating to the rights transferred to the buyer-lessor (i.e., the portion of the total gain proportionate to the rights NOT retained) - do not recognize the full gain on sale.
6) Test whether the sale price and/or the lease payments are at market terms; if not, adjust the measurement: any excess of sale proceeds over fair value is additional financing from the buyer-lessor, and any shortfall is a prepayment of lease payments.
7) From the buyer-lessor's perspective, apply normal purchase accounting for the asset and classify the leaseback as a finance or operating lease under the lessor requirements.

Measure the right-of-use asset retained as: previous carrying amount x (present value of leaseback payments / fair value of the asset at the date of sale). Measure the gain or loss recognized in profit or loss as: total gain on sale (fair value less previous carrying amount, adjusted for off-market terms) x (fair value of rights transferred / total fair value), i.e., the portion relating to the rights NOT retained. Where sale proceeds are not at fair value, gross up or down: any excess of proceeds over fair value is accounted for as additional financing (recognized as a liability, not sale proceeds); any amount by which proceeds are below fair value is accounted for as a prepayment of lease payments (added to the right-of-use asset), unless it represents a below-market lease compensated elsewhere. The lease liability for the leaseback is measured on initial recognition in the normal IFRS 16 way (present value of the leaseback payments), and subsequently amortized using the effective interest method with lease payments reducing the liability and finance cost recognized in profit or loss; the retained right-of-use asset is subsequently depreciated over the leaseback term (or useful life if shorter/ownership transfers).

Disclose: the main terms and conditions of the sale-and-leaseback transaction; the gain or loss recognized and where it is presented; the judgement made on whether control transferred (i.e., whether the transaction is a sale) and the basis for that conclusion; whether sale proceeds/lease payments were at market terms and any adjustments made for off-market terms (additional financing or prepaid rent); the resulting right-of-use asset and lease liability, included within the general IFRS 16 lease disclosures; if accounted for as a financing (no sale), disclosure of the financial liability recognized and the asset retained, consistent with financial instrument and PP&E/investment property disclosures.

• Recognizing the full gain on disposal (fair value less carrying amount) when a leaseback is retained, effectively ignoring that only the gain relating to rights transferred should hit profit or loss and the rest is absorbed into the right-of-use asset measurement
• failing to adjust for off-market sale prices that disguise additional financing (overstated proceeds) or a disguised prepayment of rent (understated proceeds)
• misclassifying a financing arrangement as a genuine sale to accelerate profit recognition, when a repurchase option or retained risk/reward pattern indicates the buyer never obtained control
• using the asset'
• s fair value in error as the total carrying amount derecognized, instead of correctly derecognizing the full previous carrying amount and separately calculating the retained right-of-use asset proportion
• omitting the buyer-lessor'
• s own lease classification analysis (finance vs operating) and assuming it mirrors the seller-lessee'
• s accounting.