Quick Summary

• A sale-and-leaseback is a transaction where an entity (the seller-lessee) sells an asset and leases it back from the buyer (the buyer-lessor).
• The transaction is accounted for in two steps: first apply IFRS 15 to determine whether the transfer is genuinely a sale, then measure the seller-lessee’s retained right of use.
• If the transfer is a sale, the seller-lessee recognizes only the portion of the gain that relates to the rights transferred to the buyer-lessor — not the full gain on the asset.
• If the transfer fails the IFRS 15 sale test, no sale is recognized at all; the “sale” proceeds are accounted for as a financial liability instead.

What Is a Sale-and-Leaseback Transaction?

A sale-and-leaseback arises whenever an entity transfers an asset it owns to another party and immediately leases that same asset back. It is a common way for businesses to release capital tied up in property or equipment while continuing to use the asset operationally — a company might sell its head office building to an investor and lease it back for the next fifteen years, for example.

The accounting is more involved than a simple asset sale followed by a new lease, because the seller-lessee never actually gives up its right to use the asset. IFRS 16 requires the two legs of the transaction to be evaluated together, starting with a question borrowed directly from IFRS 15.

Step 1: Does the Transfer Satisfy the IFRS 15 Sale Test?

Before any lease accounting is applied, the seller-lessee must determine whether the transfer of the asset qualifies as a sale under IFRS 15’s control-transfer model — the same five-step model used for ordinary revenue recognition. Control must genuinely pass to the buyer for the transaction to be treated as a sale.

If the Transfer Fails the Sale Test: Financing Accounting

Where the transfer does not qualify as a sale, the seller-lessee continues to recognize the transferred asset on its balance sheet exactly as before, and accounts for the proceeds received from the buyer as a financial liability under IFRS 9 rather than as sale proceeds or lease income. The buyer-lessor, correspondingly, does not recognize the asset at all — it simply recognizes a financial asset (a receivable) for the amount paid.

This outcome effectively treats the whole arrangement as a secured loan rather than a genuine sale-and-leaseback, which is exactly the substance IFRS 16 is trying to capture when a repurchase right or similar feature keeps control with the seller.

Step 2: If the Transfer Is a Sale — Measuring the Retained Right of Use

Where the sale test is satisfied, the seller-lessee does not simply derecognize the full asset and recognize a full gain the way it would on an outright sale to an unrelated party with no leaseback. Because the seller-lessee retains a right to use the asset going forward through the leaseback, it derecognizes only the portion of the previous carrying amount that relates to the rights it has actually given up, and recognizes a right-of-use asset for the portion it retains.

The gain or loss the seller-lessee recognizes in profit or loss relates only to the rights transferred to the buyer-lessor — that is, the portion of the asset the seller-lessee no longer has a right to use. Any gain relating to the rights retained through the leaseback is not recognized in profit or loss; it stays embedded in the measurement of the right-of-use asset instead.

Adjusting for Sale Prices or Lease Payments That Aren’t at Market Terms

If the sale price is not at fair value, or the leaseback payments are not at market rates, IFRS 16 requires an adjustment before the gain calculation: any excess of the sale price over fair value is treated as additional financing provided by the buyer-lessor to the seller-lessee (increasing the seller-lessee’s liability), and any shortfall below fair value is treated as a prepayment of lease payments (reducing the liability). This prevents parties from artificially inflating or deflating the recognized gain simply by structuring the headline sale price away from fair value.

A Worked Illustration of a Qualifying Sale-and-Leaseback

A company sells a warehouse with a carrying amount of $3,000,000 to an investor for its fair value of $5,000,000, and immediately leases it back for 10 years. The present value of the leaseback payments is $2,000,000, representing 40% of the warehouse’s fair value — meaning the seller-lessee has effectively retained a 40% interest in the asset through the leaseback and transferred 60% of the rights to the buyer-lessor.

The right-of-use asset is measured at 40% of the previous carrying amount: $3,000,000 × 40% = $1,200,000. The total gain on the sale is the $2,000,000 difference between the $5,000,000 fair value and the $3,000,000 carrying amount, but only the portion relating to the 60% of rights transferred — $1,200,000 — is recognized in profit or loss. The remaining $800,000 of economic gain relating to the retained 40% interest is not recognized; it is reflected in the lower right-of-use asset carrying amount instead of a full $2,000,000 gain hitting the income statement.

Common Mistakes in Sale-and-Leaseback Accounting

• Applying the old IAS 17 “risks and rewards” sale-and-leaseback model instead of the IFRS 15 control-transfer test that IFRS 16 actually requires.
• Recognizing the full gain on disposal, rather than only the portion relating to the rights genuinely transferred to the buyer-lessor.
• Overlooking a repurchase option that causes the transfer to fail the sale test entirely, and mistakenly applying sale-and-leaseback accounting to what is really a financing arrangement.
• Failing to adjust for off-market sale prices or lease payments, which distorts both the recognized gain and the measurement of the liability.
• Treating the leaseback lease itself as exempt from ordinary IFRS 16 lessee accounting — once recognized, the leaseback right-of-use asset and liability are subsequently measured under the standard’s normal rules, covered in Parts 1 through 4 of this series.