Sale and Leaseback Arrangements IFRS 16 - BDO

In a sale and leaseback deal, an entity (the seller-lessee) sells a property to another entity (the buyer-lessor), which then leases the property back to the seller-lessee.


As highlighted above, in a sale and leaseback transaction, the machine, owned by the seller, stays on the seller's premises at all times. The seller gets a swelling amount funding quantity from the purchaser on getting in into the sale and leaseback deal, and the seller (who is now the lessee), makes periodic payments to the buyer (who is now the lessor).


Participating in a sale and leaseback deal enables the seller-lessee to instantly get liquid funds from the buyer-lessor from selling the property, while maintaining the right to utilize the asset. In addition, if the fair worth of the asset is higher than its book worth, getting in into a sale and leaseback transaction can result in an accounting earnings being acknowledged by the seller-lessee.


Accounting for a sale and leaseback deal under IFRS 16 Leases differs substantially to representing a sale and leaseback transaction under IAS 17 Leases.


Treatment under IAS 17


Under IAS 17, the seller-lessee postpones the gain on the sale of the deal if the resulting lease is classified as a finance lease. If the resulting lease is classified as an operating lease, however, the gain is identified in complete if the earnings of the sale amount to the property's fair worth; otherwise the gain is deferred and topped the lease term.


Treatment under IFRS 16


In order to identify the proper accounting treatment under IFRS 16, the sale needs to first be evaluated to figure out whether it certifies as a sale in accordance with the requirements of IFRS 15 Revenue from Contracts with Customers.