How is a sale-and-leaseback transaction accounted for, and when is the 'sale' not really a sale?

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AcadiFi · Accepted Answer

In a sale-and-leaseback, the seller-lessee transfers an asset to a buyer-lessor and then leases it back. The accounting depends on whether the transfer qualifies as a sale under IFRS 15 (i.e., whether control of the asset has truly transferred to the buyer).

**Scenario 1: The Transfer IS a Sale**
If the transfer meets the definition of a sale (control passes to the buyer-lessor), the seller-lessee:
1. Derecognizes the asset.
2. Recognizes a lease liability and ROU asset for the leaseback.
3. Recognizes only the gain attributable to the rights transferred -- NOT the full gain.

**Gain Calculation:**
The gain recognized is proportional to the rights transferred (the portion the seller-lessee gives up). The portion retained through the leaseback generates no gain.

**Example:** Oakfield Logistics sells its warehouse (carrying value $6M, fair value $10M) to a REIT for $10M and leases it back for 5 years. The PV of lease payments is $3M (representing 30% of the $10M fair value).

- Total gain on disposal = $10M - $6M = $4M
- Rights retained via leaseback = $3M / $10M = 30%
- Rights transferred = 70%
- **Gain recognized = $4M x 70% = $2,800,000**
- The remaining $1,200,000 adjusts the ROU asset.

**Scenario 2: The Transfer IS NOT a Sale**
If the transfer fails the IFRS 15 sale criteria (e.g., the seller-lessee has a repurchase option), no sale occurs. Instead:
- The seller-lessee keeps the asset on its books.
- The cash received is recorded as a **financial liability** (essentially a loan).
- The buyer-lessor does not record the asset; it records a **financial receivable**.

This treatment applies when the transaction is economically a secured borrowing, not a genuine disposal.

**Sale at Off-Market Terms**
If the sale price exceeds fair value, the excess is treated as additional financing from the buyer-lessor (a financial liability for the seller-lessee). If the sale price is below fair value, the shortfall is treated as a prepaid lease payment.

**Exam Tip:** The key decision tree is: (1) Does control transfer? If no, treat as financing. If yes, (2) are terms at fair value? Adjust for any off-market amounts. (3) Calculate the proportional gain based on rights transferred vs. retained.

Explore more lease accounting scenarios in our CFA Level I FRA course.

How is a sale-and-leaseback transaction accounted for, and when is the 'sale' not really a sale?

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