What happens when a sale-leaseback fails the sale criteria under IFRS 15 and how is it reported?

Question

AcadiFi · Accepted Answer

When a sale-leaseback fails the sale recognition criteria under IFRS 15 (typically because control has not transferred), both parties treat the arrangement as a financing transaction rather than a sale followed by a lease.

**Worked Example -- Northbridge Manufacturing (fictional)**

Northbridge sells its factory (carrying value $4M, agreed price $5.5M) to Greystone Capital and leases it back for 15 years. The contract includes a repurchase option at a fixed price, which means control never transfers per IFRS 15.

**Seller-Lessee (Northbridge):**

| Entry | Debit | Credit |
|---|---|---|
| Cash | $5,500,000 | |
| Financial Liability | | $5,500,000 |

The factory remains on Northbridge's balance sheet at $4M and continues to be depreciated. The $5.5M received is a loan, and lease payments are treated as debt service (principal + interest).

**Buyer-Lessor (Greystone Capital):**

| Entry | Debit | Credit |
|---|---|---|
| Financial Receivable | $5,500,000 | |
| Cash | | $5,500,000 |

Greystone does NOT recognize the asset. It holds a financial receivable and recognizes interest income over the term.

\`\`\`mermaid
flowchart TD
    A[Sale-Leaseback Transaction] --> B{Does Transfer Meet IFRS 15 Sale Criteria?}
    B -->|Yes| C[Recognize Sale + Lease Separately]
    B -->|No - Failed Sale| D[Treat as Financing]
    D --> E[Seller Keeps Asset on Balance Sheet]
    D --> F[Cash Received = Financial Liability]
    D --> G[Buyer Records Financial Receivable]
    F --> H[Payments = Principal + Interest on Loan]
\`\`\`

The critical exam point: no gain or loss is recognized on a failed sale-leaseback. The asset stays put, leverage increases, and the economics resemble a secured borrowing.

What happens when a sale-leaseback fails the sale criteria under IFRS 15 and how is it reported?

Master Level II with our CFA Course

Related Questions

Practice Questions