Isg Handbook Sale and Leaseback

Sale and
leaseback
For lessees and lessors
IFRS 16
February 2023
kpmg.com/ifrs
Contents
Assessing sale and leaseback 1
1 At a glance 2
2 Identifying a sale-and-leaseback transaction 3
2.1 Is there a sale? 3
2.2 Unit of account 6
2.3 Lessee controls an asset 8
2.4 Old sale-and-leaseback transactions 10
3 Lessee accounting 13
3.1 Accounting model for lessees 13
3.2 Adjusting for off-market terms 15
3.3 Leaseback with variable payments 17
4 Lessor accounting 20
4.1 Accounting model for lessors 20
4.2 Adjusting for off-market terms 21
5 Accounting for failed sales 22
5.1 Basic requirement 22
5.2 More complex scenarios 23
6 Forthcoming requirements 25
6.1 Initial measurement 25
6.2 Subsequent measurement 29
6.3 Effective date and transition 36
Appendix I: IFRS 16 at a glance 38
Appendix II: List of examples 39
About this publication 40
Acknowledgements 41
Keeping in touch 42
Assessing sale and leaseback
IFRS 16 Leases ended sale-and-leaseback transactions as an off-balance sheet financing proposition.
However, it did not end the debates about sale-and-leaseback accounting.
Accounting for sale-and-leaseback transactions can be complex. The deals themselves are often highly
structured and can be material, especially for seller-lessees. Assessing whether a transaction qualifies
for sale-and-leaseback accounting under IFRS 16 is a key judgement. Calculating the profit or loss on
the sale is also not always intuitive.
Therefore, it is no surprise that questions on how to account for sale-and-leaseback transactions with
variable payments led to the first substantive amendments to IFRS 16. Those amendments are not yet
effective but will require seller-lessees to reassess sale-and-leaseback transactions entered into since
applying IFRS 16.
This new guide to sale-and-leaseback accounting addresses practical questions we have encountered
in applying IFRS 16. It also covers the new amendments, with detailed worked examples showing how
to account for sale-and-leaseback transactions that feature variable payments on initial recognition and
subsequently.
Whether you are assessing how to account for a new sale-and-leaseback transaction or seeking
to understand the impact of the recent amendments to IFRS 16 on existing sale-and-leaseback
transactions, we hope you will find this guide helpful.
More in-depth guidance on complex areas of IFRS 16 – including lease modifications, lease term,
discount rates and real estate leases – is available at kpmg.com/ifrs16.
Kimber Bascom
Brian O’Donovan
Marcio Rost
KPMG global IFRS leases leadership team
KPMG International Standards Group
© 2023 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2 | Sale and leaseback – For lessees and lessors
1 At a glance
In a sale-and-leaseback transaction, a seller-lessee transfers an asset to a buyer-lessor and leases that
asset back for a period of time.
To determine how to account for a sale-and-leaseback transaction, a company first considers
whether the initial transfer of the underlying asset from the seller-lessee to the buyer-lessor is a sale
(see Section 2).
The company applies IFRS 15 Revenue from Contracts with Customers to determine whether a
sale has taken place – i.e. whether control of the underlying asset passes to the buyer-lessor. If,
for example, the contract includes a substantive option that permits the seller-lessee to repurchase
the underlying asset, then the transfer would not be a sale under IFRS 15 and, therefore,
sale-and-leaseback accounting would be precluded under IFRS 16.
This assessment determines the accounting by both the seller-lessee and the buyer-lessor, as follows.
Seller-lessee Buyer-lessor
Transfer1 to buyer-lessor is a • Derecognise the underlying • Recognise the underlying

sale – see Sections 3 and 4 asset and apply the lessee asset and apply the lessor
accounting model to the accounting model to the
leaseback. leaseback.
• Measure the right-of-use
asset as a portion of the
previous carrying amount of
the underlying asset.
• Recognise only the amount
of any gain or loss related to
the rights transferred to the
buyer-lessor.
Transfer to buyer-lessor is not • Continue to recognise the • Do not recognise the

a sale – see Section 5 underlying asset. underlying asset.
• Recognise a financial liability • Recognise a financial asset
under IFRS 9 Financial under IFRS 9 for the amount
Instruments for any amount transferred to the seller-
received from the buyer- lessee.
lessor.
Note:
1 Adjustments are made if the sale is not at fair value or the lease payments are off-market.
If the transfer is a sale, then the seller-lessee always measures the right-of-use asset as a proportion
of the carrying amount of the underlying asset. This means that even if all of the lease payments are
variable, the seller-lessee always recognises a right-of-use asset and, unless the lease payments are
prepaid, a liability (see Section 3).
The recent amendments1 to IFRS 16 require that the seller-lessee applies the subsequent
measurement requirements in such a way that it does not recognise a gain or loss associated with
the rights retained under the leaseback. These new amendments are effective from 1 January 2024
(see Section 6).
1 Lease Liability in a Sale and Leaseback (Amendments to IFRS 16) issued September 2022.
2.1 Is there a sale?
2 Identifying a sale-and-
leaseback transaction
The key to identifying a sale-and-leaseback transaction is to determine whether
a sale occurs. This is critical because if there is no sale then the transaction is
accounted for as a financing arrangement.

IFRS 16.98 In a sale-and-leaseback transaction, a company (the seller-lessee) transfers an underlying asset to
another company (the buyer-lessor) and leases that asset back from the buyer-lessor.
IFRS 16.99 To determine how to account for a sale-and-leaseback transaction, a company first considers whether
the initial transfer of the underlying asset from the seller-lessee to the buyer-lessor is a sale under
IFRS 15.
IFRS 16.100 If the transfer of the asset meets the requirements for a sale in IFRS 15, then a sale has occurred and
the transaction is accounted for as a sale-and-leaseback transaction under IFRS 16.
IFRS 16.103 If the transfer of the asset does not meet the requirements for a sale in IFRS 15, then there is no sale
and the transaction is accounted for as a financing arrangement under IFRS 9.
Sale and leaseback
Seller-lessee transfers underlying asset

Seller-lessee leases that asset back
to buyer-lessor
Is the transfer of an underlying asset a sale

under IFRS 15?
Yes No
Sale Failed sale
Sale and leaseback transaction Financing arrangement
Apply IFRS 16
Apply IFRS 9
(See Section 3 for lessee accounting
(See Section 5)
and Section 4 for lessor accounting)
Example 1 – The transfer is a sale
Company B transfers an office building to Company C for 1,000,000 and at the same time leases
the building back with fixed lease payments at market rate for 10 years. The contract includes a put
option that gives C a right to require B to repurchase the building for 900,000 two years into the
lease. If C exercises the put option, the lease is terminated. C does not have a significant economic
incentive to exercise the option (see Section 5.5 of our Revenue – IFRS 15 handbook).
B and C apply IFRS 15 to determine whether a sale has taken place. Under IFRS 15, a written put
option does not in itself prevent a company from transferring control of an asset to the customer.
B and C note that the exercise price of the put option is lower than the original selling price of the
asset and C does not have a significant economic incentive to exercise the option. This means that
if the transfer were a stand-alone revenue transaction, B would account for it as a sale with a right of
return.
Therefore, B and C conclude that the transfer of the building to C qualifies as a sale under IFRS 15
and apply the sale-and-leaseback guidance in IFRS 16.
See Section 3 for B’s accounting as seller-lessee and Section 4 for C’s accounting as buyer-lessor.
Example 2 – The transfer is not a sale
Company B transfers an office building to Company C for 1,000,000 and at the same time leases
the building back with fixed lease payments at market rate for 10 years. The contract includes a
repurchase option that B can exercise for 1,200,000 from five years into the lease. If B exercises the
repurchase option, the lease is terminated.
B and C apply IFRS 15 to determine whether a sale has taken place. Under IFRS 15, if a substantive
repurchase option is in the form of a forward or a call option, then a company has not transferred
control of the asset to the customer.
Therefore, B’s transfer of the building to C does not qualify as a sale under IFRS 15 and is accounted
for as a finance arrangement under IFRS 9.
See Section 5 for the accounting for a failed sale.
Do the seller-lessee and buyer-lessor apply the same test when considering if a
transfer is a sale?
Yes. Both parties consider whether the transfer of the asset by the seller-lessee satisfies the
requirements in IFRS 15 to be accounted for as a sale of the asset. If it does not, then the
consideration for the transfer is accounted for in accordance with IFRS 9.
In practice, it is possible that a seller-lessee and a buyer-lessor might reach different conclusions
about a particular transaction – e.g. due to information asymmetry or different assessments of
the judgemental aspects of IFRS 15’s requirements. However, the requirements themselves are
identical for the seller-lessee and the buyer-lessor.
What might commonly preclude a transfer from being a sale?
Some of the features that commonly preclude a transfer from being a sale include the following.
• Seller-lessee’s repurchase option: Under IFRS 15, a substantive repurchase option in the form of
a call option or a forward precludes a sale.
• Seller-lessee’s renewal option: In some cases, a renewal option may be similar in economic
substance to a purchase option. For example, if a leaseback contains a fixed-price renewal option
that the seller-lessee is reasonably certain to exercise and which would extend the lease term
to cover substantially all of the remaining economic life of an underlying asset, then this may
preclude a sale.
• Buyer-lessor’s put option: Under IFRS 15, a substantive repurchase option in the form of a
written put option does not by itself preclude a sale. Instead, the contracting parties need to
evaluate the specific terms and conditions of the put option. If the exercise price of the put option
is higher than the original selling price of an asset and also greater than the expected market value
of that asset, then this would generally preclude a sale.
• Finance leaseback: The buyer-lessor classifying a leaseback as a finance lease does not in itself
preclude a sale. However, in our experience, only in rare circumstances would the transfer qualify
as a sale when the leaseback is a finance lease. See below for more detail.
Can you have a sale and finance leaseback?
IFRS 16.BC262(a) Technically, yes, but it is expected to be rare.

The International Accounting Standards Board (IASB) observed that the presence of a leaseback
does not, in isolation, preclude the seller-lessee from concluding that it has transferred the underlying
asset to the buyer-lessor. This is because a lease differs from a sale – i.e. a lease does not transfer
control of the underlying asset to the lessee; instead, it transfers the right to control the use of the
underlying asset for the period of the lease.
If the leaseback is classified as a finance lease, then it is more likely to contain features that cause
the seller-lessee to effectively retain control of the underlying asset rather than obtaining a right to
control the use of that asset. In this case, the transfer would fail the IFRS 15 test.
Does a failed sale need to be reassessed?
It depends. Generally, the passage of time alone would not result in a reassessment. However,
if a change in facts and circumstances indicates that the rights and obligations of the contracting
parties have changed, then it may need to be reassessed. For example, if a substantive repurchase
option that previously contributed to a failed-sale conclusion lapses without being exercised, then a
company would reassess whether the transfer now qualifies as a sale. This could result in sale-and-
leaseback accounting from the date of the lapse, depending on the other facts and circumstances.
Does the legal form of the transfer matter?
IFRS 16.BC261 No. The IASB noted that when a company is considering whether a transaction is accounted for as
a sale-and-leaseback transaction, it needs to consider not only those transactions structured in the
form of a legal sale-and-leaseback, but also other forms of transactions for which the economic effect
is the same as a legal sale-and-leaseback – e.g. some lease-and-leaseback transactions.
2.2 Unit of account

IFRS 16.99 IFRS 16 describes a sale-and-leaseback as a transaction in which a company transfers an asset to
another company and leases back that asset. Questions can arise regarding whether to apply sale-and-
leaseback accounting in specific circumstances – e.g. when:
• a company transfers an asset and leases back a portion of that asset;
• a company transfers a portfolio of assets and leases back only some assets in the portfolio;
and
• the assets subject to the transaction are fungible – i.e. they are essentially interchangeable, as is
generally the case for commodities.
If a sale-and-leaseback transaction involves land and buildings previously accounted for by the seller-
lessee under IAS 16 Property, Plant and Equipment, then it appears that the land and buildings need
to be assessed separately when applying IFRS 15 to determine whether a sale has taken place. This
is because under IAS 16 land and buildings are recognised as separate assets and its requirements on
asset disposals apply separately to each item of property, plant and equipment.
Example 3 – Sale and leaseback of land and buildings
Company B transfers an item of real estate to Company C and at the same time leases it back for
20 years, which is equal to the economic life of the building. The real estate comprises the building
and the freehold land on which it stands.
When applying IFRS 15 to determine whether a sale has taken place, B assesses the land and
building separately, considering the following.
• The land and the building were accounted for separately under IAS 16.
• The derecognition requirements in IAS 16 apply separately to each item of property, plant and
equipment.
This may result in different conclusions for the land and the building – i.e. the transfer of the land,
which typically has an indefinite useful life, may qualify as a sale but the transfer of the building
may not.
2.2 Unit of account
Are land and buildings always treated separately when identifying a sale-and-
leaseback transaction?
No. It depends on the facts and circumstances. A key consideration is how the seller-lessee
accounted for the land and buildings before the transaction.
In Example 3 above, Company B classifies the land and the building as property, plant and equipment.
Specifically, B recognises them as separate items. B depreciates the building over its useful life but
does not depreciate the land.
However, the unit of account for this assessment would differ if B classified the item of real estate as
investment property with no own-use element and applied the fair value model. In this case, B would
treat the real estate as a single unit of account under IAS 40 Investment Property. If B transferred the
real estate to another party and leased it back, then B would treat the real estate as a single unit of
account when assessing whether sale-and-leaseback accounting applies.
If a company sells a building and leases part of it back, what is the unit of account for
determining whether the transaction qualifies for sale-and-leaseback accounting?
Consider an example where Company B transfers a 10-storey building to Company C and

immediately leases five floors back.
There is no guidance in IFRS 16 on what the unit of account is in such cases. In our view, one
acceptable approach may be to consider the requirements in paragraph 10 of IAS 40 by analogy.
IAS 40 requires a portion of a property held-for-use and a portion held for rentals and/or capital gains
to be considered separately if that portion could be sold separately or leased out separately under a
finance lease.
Applying this guidance by analogy, if each floor could be sold or leased out separately under a finance
lease, B would determine whether a sale has occurred for each floor. This would lead to B accounting
for a sale of the five floors that have not been leased back, provided that there is no other factor
preventing a sale. B would account for the other five floors that have been leased back as being
subject to either a sale-and-leaseback transaction or a financing.
If each floor could not be sold or leased separately under a finance lease, B would determine whether
a sale has occurred for the whole building. Therefore, either the transfer of the whole building
qualifies as a sale, and sale-and-leaseback accounting applies, or the transfer of the whole building is
a failed sale, and accounted for as a financing transaction.
We believe another acceptable approach would be to consider only whether the floors could be sold
separately. If this were the case, B would determine whether a sale has occurred for each floor. If
not, it would determine whether a sale has occurred for the whole building.
Can you have a sale and leaseback of a commodity?
This is a complex area and different considerations may apply in different cases. One of the common
characteristics of commodities is that they are largely fungible – e.g. a gold bar can easily be replaced
with another similar gold bar. Because of this characteristic, in commodity loan transactions a
contract is unlikely to require that the asset returned at the end of the contract term is the specific
asset loaned.
In a stand-alone transaction described as a ‘lease’ of a commodity, the lease definition is often not
met because there is no identified asset – i.e. the commodity is fungible. By extension, a contract
described as a sale and leaseback of a commodity will not be a sale and leaseback if the leaseback
does not meet the definition of a lease.
Complications might arise if the contract includes the transfer of a commodity and a call
option without a leaseback. Under IFRS 15, a substantive call option precludes a sale when
that option relates to the original asset transferred or ‘an asset that is substantially the same
as that asset’. In this situation, when there is no sale, IFRS 15 requires that the transaction is
accounted for as a lease when the exercise price of the call option is lower than the original
selling price. However, the lease definition in IFRS 16 would not be met because there is
no identified asset. The IASB decided to leave this as an unresolved issue, expecting such
transactions to be unlikely.
Can you have a sale and leaseback of a digital asset?
It depends. This is another complex area with different considerations applying in different cases.
A key consideration will often be whether the digital asset can be an identified asset – e.g. can it
be uniquely identified or is it fungible? If the digital asset is fungible, then the considerations for
commodities discussed above will apply.
2.3 Lessee controls an asset

IFRS 16.B46 Sale-and-leaseback accounting may be required if a lessee controls the underlying asset before it is
transferred to the lessor.
IFRS 16.B47 If the lessee does not control the underlying asset before it is transferred to the lessor, then the
transaction is a lease and not a sale-and-leaseback transaction.
IFRS 16.B45 A lessee may obtain legal title to an underlying asset before that legal title is transferred to the lessor
and the asset is leased to the lessee. Obtaining legal title does not in itself determine whether the
lessee controls the asset before it is transferred to the lessor.
2.3 Lessee controls an asset
Example 4 – Lessee controls an asset under construction
Company B and Company C enter into a contract under which C will construct a building on B’s land
and will lease that building to B. Specific terms and conditions of the contract are as follows.
• B will lease its land to C for a fixed term of 50 years.
• C will construct the building on the leased land, starting after the land lease has commenced.
Construction will take approximately two years. The economic life of the building is expected to be
40 years.
• C will fund the construction costs of the building.
• The building will be constructed to B’s specifications. However, it will follow a general design for
office buildings in an area where there is a high demand for similar buildings.
• On completing construction, C will lease the building to B for a fixed term of five years. The lease
of the building does not include a renewal option.
• B does not have a right to purchase the building during construction.
B needs to determine whether it controls the building during construction. If it does, then it will
account for the transaction as a sale-and-leaseback transaction – i.e. starting from the beginning of
construction, B will recognise the building as a construction-in-progress asset with a corresponding
liability for the construction costs funded by C. Conversely, if B does not control the building during
construction, then it will recognise a lease of the building only when the construction is complete and
the lease commences.
IFRS 16 does not define control. Therefore, when assessing control, B considers the definition in
IFRS 15 – i.e. the ability to direct the use of, and obtain substantially all of the remaining benefits
from, the asset. Applying this definition, B considers the following.
• B does not have a right to purchase the building during construction.
• The completed building will not be highly customised and as such will have alternative use to C.
• C leases the land for 50 years, which covers substantially all of the economic life of the building.
This means that C controls the right to use the land for at least substantially all of the economic life
of the building.
Following its assessment, B concludes that it does not control the building during construction.
Therefore, the transaction is a lease and not a sale-and-leaseback, and will be accounted for in B’s
financial statements only after construction is complete and the lease commences.
What factors does a company need to consider when assessing whether it controls
an asset before transfer to the lessor?
Control is not defined in IFRS 16. Under paragraph 10 of IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, management uses judgement to develop and apply an accounting
policy when there is no IFRS® Accounting Standard that specifically applies to a transaction, other
event or condition. The hierarchy in paragraph 11 of IAS 8 requires that a company consults other
IFRS Accounting Standards – e.g. IFRS 15. This standard was developed in a similar timeframe to
IFRS 16 and is generally viewed as having a definition of control that is consistent with IFRS 16.
Under paragraph 33 of IFRS 15, control of an asset refers to the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset. Control includes the ability to prevent
other entities from directing the use of, and obtaining the benefits from, an asset. Paragraph 35
further explains situations where control is transferred over time, which may be especially relevant in
assessing control over an asset under construction.
How does a lessee assess whether sale-and-leaseback accounting is required when

multiple parties are involved?
IFRS 16.B45-B47 For highly-customised assets, a manufacturer, a lessor and a lessee may enter into a negotiation for
the purchase of an asset from the manufacturer by the lessor, which in turn is leased to the lessee.
For example, an aircraft manufacturer, a bank (lessor) and an airline company (lessee) may negotiate
that the aircraft manufacturer will build an aircraft to the airline company’s specifications, but it will be
the bank that purchases the aircraft and then leases it to the airline company.
In determining whether sale-and-leaseback accounting is required, the key question is whether the
airline company obtains control of the aircraft before it is purchased by the bank.
If it is determined that the bank obtains control of the aircraft from the aircraft manufacturer before it
is leased to the airline company, then the transaction will be accounted for solely as a lease between
the bank (lessor) and the airline company (the lessee): there is no sale and leaseback.
In contrast, if the airline company is determined to obtain control of the aircraft from the aircraft
manufacturer, then the arrangement between the airline company and the bank will be accounted for
as a sale and leaseback.
In some cases, legal title of the asset may momentarily be transferred to the lessee (i.e. the airline
company in our example) before it eventually transfers to the lessor (i.e. the bank). This may occur for
various reasons, including tax and legal. However, paragraph B47 of IFRS 16 indicates that this alone
does not mean that the lessee controlled the asset before its acquisition by the lessor.
2.4 Old sale-and-leaseback transactions

IFRS 16.C16 The discussion in the preceding sections does not apply to sale-and-leaseback transactions entered
into before the date of initial application of IFRS 16. This is because on transition to IFRS 16 a company
did not reassess sale-and-leaseback transactions entered into before the date of initial application to
determine whether a sale occurred under IFRS 15.
IFRS 16.C17 Instead, for a sale-and-leaseback transaction accounted for as a sale and a finance lease under IAS 17
Leases, the seller-lessee:
• accounted for the leaseback in the same way as for any finance lease that existed at the date of
initial application; and
• continued to amortise any gain on the sale over the lease term.
IFRS 16.C18 Similarly, for a sale-and-leaseback transaction accounted for as a sale and an operating lease under
IAS 17, the seller-lessee:
• accounted for the leaseback in the same way as for any other operating lease that existed at the date
of initial application; and
• adjusted the leaseback right-of-use asset for any deferred gains or losses that related to off-market
terms recognised in the statement of financial position immediately before the date of initial
application.
2.4 Old sale-and-leaseback transactions
Example 5 – Old sale-and-leaseback transaction that would be a failed sale under

IFRS 16
IFRS 16.99, 103, C18, In 2004, Company R sold its head office building to Company P and leased the building back for
IFRS 15.B66 20 years. R has an option to repurchase the building for its market value between years 16 and 20.
In assessing the classification of the leaseback under IAS 17, R noted that the exercise price of the
repurchase option was at market value and therefore P retained the risk (reward) of any change in the
market value of the building. R also noted that there were no other indicators that the leaseback was
a finance lease. R therefore accounted for this transaction as a sale and operating leaseback – i.e.
R derecognised the building and recognised the rentals payable to P as an expense on a straight-line
basis over the term of the leaseback.
On 1 January 2019:
• R’s leaseback of its head office building has a remaining term of five years; and
• the present value of the lease payments, discounted at R’s incremental borrowing rate at 1
January 2019, is 500.
R notes that its option to purchase the building means that the transaction does not meet the criteria
to be recognised as a sale under IFRS 15. This means that if R entered into the transaction on these
terms after adopting the new standard, then it would account for it as a financing under IFRS 9 and
not as a sale-and-leaseback. However, because the transaction was in place at the date of initial
application of IFRS 16, R continues to account for it as a sale-and-leaseback.
R elects to adopt IFRS 16 using a modified retrospective approach. It measures the right-of-use asset
based on the amount of the lease liability and takes the practical expedient that permits it not to
recognise initial direct costs (see our Leases: Transition Options publication).
On 1 January 2019, R recognises a right-of-use asset of 500 and a lease liability of 500.
Is it possible to align the accounting treatment of old and new sale-and-leasebacks?
No. IFRS 16 provides two significant reliefs for existing sale-and-leasebacks on transition. Because
these reliefs are not optional, there is no opportunity for a seller-lessee to fully align the accounting
treatment of sale-and-leaseback transactions entered into before and after the date of initial
application of the new standard.
• Under the first relief, a company does not assess whether an existing sale-and-leaseback qualifies
for sale-and-leaseback accounting on transition – i.e. it does not assess whether the sale leg would
meet the criteria to be recognised as a sale under IFRS 15. This is an important relief because it
eliminates the possibility that the company might be required to account for an existing sale-and-
leaseback as a financing under IFRS 9. This relief applies to seller-lessees and to buyer-lessors.
• Under the second relief, a seller-lessee does not apply the partial gain recognition approach to sale-
and-leaseback transactions entered into before the date of initial application. This decision was
intended to simplify transition for companies that have many such transactions at the date of initial
application.
In other respects, the transition requirements for the leaseback leg of a sale-and-leaseback
transaction are consistent with the general transition requirements for all leases. As a result, an
existing sale-and-leaseback will generally come on-balance sheet for the seller-lessee through
applying the new lease accounting model to the leaseback. The only exceptions will be leasebacks
to which the recognition exemptions apply (See ‘Do IFRS 16’s recognition exemptions apply to the
leaseback?’).
Does a seller-lessee reassess an old sale-and-leaseback transaction if it is modified

after the date of initial application of IFRS 16?
No. Even if there is a modification to a contract subsequently, a company does not reassess
sale-and-leaseback transactions entered into before the date of initial application to determine
whether a sale occurred under IFRS 15. Instead, the company accounts for the modification
prospectively in accordance with the modification requirements in IFRS 16.
3.1 Accounting model for lessees
3 Lessee accounting
Specific guidance determines the gain or loss recognised on a sale-and-leaseback
transaction and the initial carrying amount of the right-of-use asset.
3.1 Accounting model for lessees

IFRS 16.100, BC 266 If a sale-and-leaseback transaction qualifies as a sale (see Section 2), then the seller-lessee measures
the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of
the asset relating to the right of use retained by the seller-lessee.
This means that the amount of any gain or loss recognised by the seller-lessee is limited to the
proportion of the total gain or loss relating to the rights transferred to the buyer-lessor. This reflects
the economics of the transaction – i.e. the seller-lessee has sold only its interest in the value of the
underlying asset at the end of the leaseback.
Accounting for the seller/lessee
Transfer to buyer-lessor is a • Derecognise the underlying asset and apply the lessee
sale1 accounting model to the leaseback.
• Measure the right-of-use asset at the retained portion of the
previous carrying amount (i.e. at cost).
• Recognise only the amount of any gain or loss related to the
rights transferred to the lessor.
Transfer to buyer-lessor is not • See Section 5.

a sale
Note:
1 Adjustments are required if the sale is not at fair value or lease payments are off-market.
Example 6 – Sale-and-leaseback transaction is a sale with on-market terms
IFRS 16.IE11 Company C sells an office building to Company D for cash of 1,000,000 (the fair value of the building
at that date). Immediately before the transaction, the building is carried at a cost of 500,000. At the
same time, C enters into a contract with D for the right to use the building for 15 years with annual
payments (which are at market rates) of 80,000 payable at the end of each year. The transfer of the
office building qualifies as a sale under IFRS 15. C’s incremental borrowing rate is 5.0% per annum.
The present value of the annual payments is 830,400, corresponding to 15 annual payments of
80,000 discounted at 5.0% per annum.
C determines that an appropriate method to determine the portion of the rights retained is to
compare the present value of the lease payments with the fair value of the asset.
C recognises the transaction as follows.
• C measures the right-of-use asset retained through the leaseback of the office building as a
proportion of its previous carrying amount – i.e. 415,200 (830,400 / 1,000,000 x 500,000).
• The total gain on the sale of the building amounts to 500,000 (1,000,000 − 500,000), of which:
- 415,200 (830,400 / 1,000,000 × 500,000) relates to the right to use the office building retained
by C; and
- 84,800 ((1,000,000 − 830,400) / 1,000,000 × 500,000) relates to the rights transferred to D.
• C recognises a gain of 84,800, which is the portion of the gain on sale that relates to the rights
transferred to D.
At the leaseback commencement date, C records the following entries.
Debit Credit
Cash 1,000,000
Right-of-use asset 415,200
Building 500,000
Lease liability 830,400
Gain on sale-and-leaseback 84,800
To recognise sale-and-leaseback
Is it possible to still achieve off-balance sheet accounting for a sale-and-leaseback?
No. IFRS 16 ends sale-and-leasebacks as a method for achieving off-balance sheet accounting.
Under the previous standard, IAS 17, the accounting for a sale-and-leaseback transaction depended
on the type of lease involved. If the leaseback qualified as an operating lease under that standard, and
the lease payments and sale price were at fair value, then the transaction was recorded as a normal
sale transaction and the total profit or loss was recognised immediately. This provided a structuring
opportunity for companies to recognise gains by moving assets off-balance sheet while continuing to
use them.
Under IFRS 16, this is no longer possible and the seller-lessee:
• generally recognises the lease on its balance sheet (unless the leaseback is a short-term or low-
value asset, see below); and
• recognises a gain only for the portion of the asset transferred to the buyer-lessor.
Do IFRS 16’s recognition exemptions apply to the leaseback?
IFRS 16.A, 5 Yes. Under IFRS 16, seller-lessees can apply the recognition exemptions to the leaseback – i.e.
the lease element of a sale-and-leaseback transaction. If a seller-lessee elects to apply the short-
term lease recognition exemption for the applicable class of underlying asset transferred, then that
election applies when accounting for the short-term leaseback.
3.2 Adjusting for off-market terms
The recognition exemptions cover:

• leases with a lease term of 12 months or less that do not contain a purchase option (i.e. short-term
leases); and
• leases for which the underlying asset is of low value when it is new.
In practice, these exemptions are unlikely to be relevant to typical ‘big-ticket’ sale-and-leaseback
transactions. Nevertheless they could affect, for example, a short-term sale-and-leaseback
transaction that spans two different accounting periods, or one involving the sale and leaseback of
a portfolio of low value assets that are material in aggregate – e.g. the sale and leaseback of a large
number of laptop computers.
Using the recognition exemptions does not affect IFRS 16’s requirements on:
• measuring the right-of-use asset arising from the leaseback; and
• recognising only the amount of the gain or loss that relates to the rights transferred to the buyer-
lessor. The seller-lessee accounts for the gain or loss relating to the rights retained by adjusting its
lease expense.

IFRS 16.101 IFRS 16 requires that if the sale-and-leaseback transaction is not on market terms, then a company:
• recognises the sale proceeds at fair value; and
• accounts for any below-market terms as a prepayment of lease payments and any above-market
terms as additional financing provided by the buyer-lessor to the seller-lessee.
IFRS 16.102 A company measures any potential adjustment required for off-market terms on the basis of the more
readily determinable of:
• the difference between the fair value of the consideration for the sale and the fair value of the
underlying asset; and
• the difference between the present value of the contractual payments for the lease and the present
value of payments for the lease at market rates.
Is it always necessary to adjust for off-market terms?
IFRS 16.BC267 Yes. In a sale-and-leaseback transaction, the lease payments and the sale price are typically
negotiated together and are, therefore, interdependent. For example, if the rentals under the
leaseback are above market rate, then the sale price under the contract might be set at a value that
exceeds the asset’s fair value to reflect this. Conversely the sale price might be less than the asset’s
fair value because the leaseback rentals are below market rate. Therefore, using the contractual
amounts to account for the transaction could result in a misstatement of:
• gains or losses on disposal of the asset, as well as financial liabilities and interest expense (if the
sale price exceeds fair value) or right-of-use assets and depreciation thereof (if the sale price is less
than fair value) for the seller-lessee; and
• the carrying amount of the asset and leaseback rental income for the buyer-lessor.
Example 7 – Sale-and-leaseback transaction is a sale with off-market terms
IFRS 16.IE11 Company C sells an office building to Company D for cash of 1,000,000. Immediately before the
transaction, the building is carried at a cost of 500,000. At the same time, C contracts with D for the right to
use the building for 15 years with annual payments of 80,000 payable at the end of each year. The transfer
of the office building qualifies as a sale under IFRS 15. C’s incremental borrowing rate is 5.0% per annum.
The fair value of the office building on the date of sale is 900,000. Because the consideration for the
sale of the office building exceeds its fair value, C makes adjustments to recognise the transaction
at fair value. The amount of the excess sale price of 100,000 (1,000,000 − 900,000) is recognised as
additional financing provided by D to C.
The present value of the annual payments is 830,400. Of this amount, 100,000 relates to the
additional financing and 730,400 relates to the lease – corresponding to 15 annual payments of 9,634
and 70,366, respectively, when discounting at 5.0% per annum.
C determines that an appropriate method to determine the portion of the rights retained is to
compare the present value of the lease payments with the fair value of the asset.
proportion of its previous carrying amount – i.e. 405,778 (730,400 / 900,000 × 500,000).
• The total gain on the sale of the building amounts to 400,000 (900,000 − 500,000), of which:
- 324,622 (730,400 / 900,000 × 400,000) relates to the right to use the office building retained by
C; and
- 75,378 ((900,000 − 730,400) / 900,000 × 400,000) relates to the rights transferred to D.
• C recognises a gain on sale of 75,378, which is the portion of the gain on sale that relates only to
the rights transferred to D.
At the lease commencement date, C records the following entries.
Debit Credit
Cash 1,000,000
Building 500,000*
Financial liability 830,400*
Gain on sale-and-leaseback 75,378*
Note:
* Comprising 730,400 relating to the lease and 100,000 related to the additional financing.
Section 6 discusses the impact of forthcoming requirements on the classification of these amounts.
After the lease commencement date, C accounts for the annual payments of 80,000 as follows.
• C recognises 70,366 as lease payments.
• C accounts for the remaining 9,634 as payments to repay the financial liability of 100,000 and
interest expense.
3.3 Leaseback with variable payments
Is a company required to maximise the use of observable prices and information when
determining the formula to use in measuring the potential adjustment for off-market
terms?
No. Under IFRS 16, a company measures any potential adjustment using the more readily
determinable of the difference between:
• the fair value of the sale price and the fair value of the asset; and
• the present value of the contractual payments for the lease and the present value of payments for
the lease at market rates.
These comparisons may yield different results, but a company can use either to identify whether it
needs to adjust the accounting for the transaction for off-market terms.
Using observable prices and information to determine fair value and deciding which formula to use is
consistent with IFRS 13 Fair Value Measurement. However, IFRS 16 contains its own definition of fair
value for lessors; IFRS 13 does not apply to lease transactions.

IFRS 16.100, IU 06-20 The payments for the lease in a sale-and-leaseback transaction may be fully variable depending on sales
or usage. In these cases, a question arises on how to measure the right-of-use asset arising from the
leaseback and how to determine the amount of any gain or loss to be recognised at the date of the
transaction. The IFRS Interpretations Committee discussed this issue and noted that a seller-lessee
applies the requirements of paragraph 100 of IFRS 16 to measure the right-of-use asset arising from
the leaseback (see also Section 6 on forthcoming requirements). That is, the seller-lessee measures the
right-of-use asset at the proportion of the previous carrying amount of the asset relating to the right of
use retained. In doing so, the seller-lessee compares the right of use retained to the rights relating to
the underlying asset it held before the sale-and-leaseback transaction.
IFRS 16.100, IU 06-20 If a gain or loss relating to the rights transferred to the buyer-lessor arises, then this is determined using
the same proportion as for measuring the right-of-use asset. The seller-lessee also recognises a liability.
The initial measurement of this liability will vary according to how the seller-lessee measures the right-
of-use asset and determines the gain or loss arising on the transaction.
Example 8 – Sale-and-leaseback transaction with variable payments
IFRS 16.100, IU 06-20 Company C sells an office building to Company D for 900,000 (the fair value of the building at that date).
Immediately before the transaction, the building is carried at a cost of 500,000. The transfer of the office
building qualifies as a sale under IFRS 15. At the same time, C contracts with D for the right to use the
building for five years. All the payments for the lease are variable, calculated as a market-rate percentage
of C’s revenue generated from using the building during the five-year lease term. At the date of the
transaction, the present value of the expected payments for the lease is 225,000. There are no initial direct
costs.
C determines that it is appropriate to calculate the proportion of the building relating to the right of use
retained using the present value of the expected payments for the lease. On this basis, the proportion
of the building that relates to the right of use retained is 25% (225,000 / 900,000). Consequently, the
proportion of the office building that relates to the rights transferred to D is 75% (900,000 – (225,000 /
900,000)).

proportion of its previous carrying amount – i.e. 125,000 (225,000 / 900,000 × 500,000).
• The total gain on the sale of the building amounts to 400,000 (900,000 – 500,000), of which:
- 100,000 (225,000 / 900,000 × 400,000) relates to the right to use the office building retained by
C; and
- 300,000 ((900,000 − 225,000) / 900,000 × 400,000) relates to the rights transferred to D.
C recognises a gain of 300,000 – i.e. the portion of the total gain that relates only to the rights transferred to
D. At the commencement date, C records the following entries.
Debit Credit
Cash 900,000
Building 500,000
Liability 225,000
Gain on sale-and-leaseback 300,000
Does IFRS 16 prescribe a method for determining the proportion of the previous
carrying amount of the asset that relates to the right of use retained?
No. Depending on the facts and circumstances, potential methods that may be appropriate include
comparing:
• the present value of expected payments for the leaseback (including those that are variable) with
the fair value of the underlying asset at the date of the transaction;
• for a transaction involving a building, the amount of floor space retained under the leaseback
arrangement with the amount of floor space before entering into the arrangement; and
• the leaseback term relative to the total period of use of the underlying asset.
Can the right-of-use asset be zero in a leaseback with variable payments?
IFRS 16.100, IU 06-20 No. The seller-lessee’s right-of-use asset in a leaseback with variable payments is not measured
at zero at the date of the transaction, because this would not reflect the proportion of the previous
carrying amount of the asset relating to the right of use retained by the seller-lessee.
Is the resulting credit necessarily a lease liability?
It depends. Whether the liability is a lease liability depends on whether the seller-lessee has adopted
the September 2022 amendments to IFRS 16 Lease Liability in a Sale and Leaseback.
When the IFRS Interpretations Committee discussed the accounting for a leaseback with variable
terms, the Committee did not describe the liability as a lease liability. If it had done so, it would
have meant that a seller-lessee could have recognised a gain on the right of use it retains through
mechanical application of the subsequent measurement requirements for lease liabilities –
e.g. following a lease modification or change in the lease term.
For example, variable lease payments that do not depend on an index or rate are excluded from
IFRS 16’s definition of lease payments. This means that applying IFRS 16’s remeasurement guidance
to a leaseback involving such payments could result in a seller-lessee recognising a gain, even though
no transaction or event would have occurred.
In contrast, the September 2022 amendments specify that the liability is a lease liability. This is
because the September 2022 amendments require a seller-lessee to subsequently measure lease
liabilities arising from a leaseback in such a way that it does not recognise any amount of the gain or
loss that relates to the right of use it retains (see Section 6).
4 Lessor accounting
In a sale-and-operating leaseback transaction, the buyer-lessor recognises the
underlying asset and an operating lease to the seller-lessee, and adjusts for any
off-market components.
4.1 Accounting model for lessors

IFRS 16.100(b) If a sale-and-leaseback transaction qualifies as a sale (see Section 2), the buyer-lessor recognises the
underlying asset under applicable IFRS Accounting Standards and applies the lessor accounting model
in IFRS 16 to the leaseback.
Accounting for the buyer-lessor
Transfer is a sale1 • Recognise the underlying asset and apply the lessor accounting
model to the leaseback.
Transfer is not a sale • See Section 5.

Note:
1 Adjustments are required if the sale is not at fair value or lease payments are off-market.
Example 9 – On-market sale-and-leaseback transaction
Assume the same facts as in Example 6.

D recognises the underlying asset (building) at cost under applicable IFRS Accounting Standards
(IAS 16 or IAS 40). Therefore, at the commencement date, D records the following entries.
Debit Credit
Building 1,000,000
Cash 1,000,000
D then applies IFRS 16’s lessor accounting model to the leaseback.

D first assesses whether the lease is a finance lease or an operating lease. If D concludes that the
lease is an operating lease, then D will continue to recognise the building as an asset measured
under either IAS 16 or IAS 40.
D recognises the lease payments from C as income over the leaseback term on a straight-line basis,
or another systematic basis if that is more representative of the pattern in which it derives benefit
from using the underlying asset.
4 Lessor accounting 21
Do lessors apply the lease classification test?
IFRS 16.61-66 Yes. After recognising the underlying asset under applicable IFRS Accounting Standards, the
buyer-lessor applies IFRS 16’s lessor accounting model to the leaseback. This includes the lease
classification test in paragraphs 61 to 66. Therefore, the lessor’s subsequent accounting differs
depending on whether it classifies the leaseback as an operating lease or a finance lease.
As noted in Section 2, classifying the leaseback as a finance lease does not preclude the possibility
that sale-and-leaseback accounting applies. The lease classification depends on the facts and
circumstances and the terms of the leaseback.

IFRS 16.101 IFRS 16 requires that if the fair value of the consideration for the sale of the asset in a sale-and-
leaseback transaction is not equal to the fair value of the asset, or if the lease payments are not at
market rates, then a company:
• recognises the sale proceeds at fair value; and
• accounts for any below-market terms as a prepayment of lease payments, and any above-market
terms as additional financing provided by the buyer-lessor to the seller-lessee.
IFRS 16.102 A company measures any potential adjustment required for off-market terms on the basis of the more
readily determinable of the difference between:
• the fair value of the sale price and the fair value of the underlying asset; and
• the present value of the contractual payments for the lease and the present value of payments for
the lease at market rates.
Example 10 – Sale-and-leaseback transaction in a sale with off-market terms
Assume the same facts as in Example 7.

D recognises the underlying asset (building) at fair value of the sale proceeds (900,000) and accounts
for the above-market terms (100,000) as additional financing that it provides to C. Therefore, at the
commencement date, D records the following entries.
Debit Credit
Building 900,000
Financial asset 100,000
Cash 1,000,000
After the commencement date, D accounts for the annual payments of 80,000 as follows:
• D recognises 70,366 as lease payments.
• D accounts for the remaining 9,634 as payments received to settle the financial asset of 100,000
and interest revenue.
5 Accounting for failed sales

The seller-lessee and the buyer-lessor account for failed sales as financing
arrangements under IFRS 9.
5.1 Basic requirement

IFRS 16.103 If the transfer of an asset in a sale-and-leaseback arrangement is a failed sale – i.e. it does not satisfy
the requirements in IFRS 15 to be accounted for as an asset sale – then the seller-lessee continues
to recognise the transferred asset and recognises a financial liability equal to the transfer proceeds. It
accounts for the financial liability subsequently under IFRS 9.
Similarly, the buyer-lessor does not recognise the transferred asset. Instead, it recognises a financial
asset equal to the transfer proceeds and accounts for that asset subsequently under IFRS 9.
Example 11 – Sale-and-leaseback transaction is a failed sale
Company C sells a commercial building to Company D for cash. C also contracts with D for the right
to use the building for 15 years with annual payments payable at the end of each year. The contract
contains a clause that gives C a substantive option to repurchase the building from D at its fair value.
The transfer of the building does not meet the criteria in IFRS 15 to be accounted for as a sale of
the transferred asset. This is because C’s option to repurchase the building means that it has not
transferred control of the building to D. Accordingly, C continues to recognise the building and
recognises a financial liability equal to the amount of the transfer proceeds received. C accounts for
the financial liability subsequently under IFRS 9.
D does not recognise the building as its asset but instead recognises a financial asset equal to the
transfer proceeds.
Does the accounting by a seller-lessee differ substantially between a failed sale and a
successful sale?
Yes. Although the seller-lessee will recognise a liability for its obligation to make payments to the
buyer-lessor under both failed-sale accounting and sale-and-leaseback accounting, there are two key
differences.
Firstly, the seller-lessee will not recognise a gain or loss on the date of a failed sale. In contrast,
under sale-and-leaseback accounting a seller-lessee will generally recognise a gain or loss on the
rights transferred.
Secondly, the subsequent measurement requirements differ for a financial liability arising from a
failed sale, which is measured under IFRS 9, and a lease liability arising from sale-and-leaseback
accounting. Many common features of lease liabilities – e.g. renewal and termination options,
purchase options and variable lease payment mechanisms – may be complex to account for under
IFRS 9. Lease liabilities, including lease liabilities arising from sale-and-leaseback transactions, are
outside the scope of IFRS 9 for measurement purposes.
5 Accounting for failed sales 23
5.2 More complex scenarios
5.2 More complex scenarios

IFRS 9.A IFRS 9 is silent on how to subsequently measure the amortised cost of the financial liability. If there is
no embedded derivative that is separated, then in our view a company calculates the effective interest
rate on initial recognition of the financial liability by estimating future cash payments and considering:
• the expected lease payments over the expected term of the leaseback (excluding any portion
representing compensation to the lessor for costs relating to the asset – e.g. maintenance); and
• expectations relating to the final cash flow to settle the liability. This may be the option exercise price
if the asset is expected to be repurchased. However, if the asset is expected to be surrendered to
the buyer-lessor, then this may be the expected fair value of the underlying asset at the end of the
leaseback period.
IFRS 9.B5.4.6 In our view, if during the contractual term the company’s expectations change about exercising the
purchase option, then it should revise the estimated cash flows, adjust the amortised cost of the
financial liability and recognise the adjustment in profit or loss.
Example 12 – Determining contractual cash flows for a failed-sale financial liability

in a sale-and-leaseback arrangement
On 1 January 2022, Company K enters into a sale-and-leaseback transaction for a vessel. The
arrangement contains a substantive repurchase option, and therefore is a failed sale under IFRS 15.
The details of the transaction are as follows.
• K receives cash proceeds of 1,250 at the start of the arrangement.
• The contractual period is five years.
• Annual payments of 220 are payable at the end of each year.
• The annual payments do not include any amounts that represent compensation to the lessor for
costs relating to the asset.
• The agreement gives K an option to repurchase the vessel at the end of the arrangement for a
fixed price of 670 and it is K’s intention to exercise the option.
At the start of the arrangement, K recognises a financial liability of 1,250 for the proceeds received. K
determines on initial recognition that the expected future cash flows are as follows.
• Annual cash outflows of 220.
• A cash outflow of 670 at the end of year five.
Based on these estimated cash flows, K calculates the effective interest rate as 10% and uses this
rate to recognise interest expense during the period of the arrangement as follows.
Date Annual payment Interest Carrying amount of liability

1 January 2022 – – 1,250
31 December 2022 220 125 1,155
31 December 2023 220 116 1,051
31 December 2024 220 105 936
31 December 2025 220 93 809
31 December 2026 220 81 670
Total 1,100 520
At the end of the contractual term, K exercises the repurchase option as expected and settles the
liability by paying the option exercise price of 670.
Is a failed sale always accounted for at fair value on initial recognition?
IFRS 16.103; No. If the transfer of the asset is not a sale, then IFRS 16 requires the seller-lessee to recognise a
IFRS 9.B5.1.1 financial liability, and the buyer-lessor a financial asset, equal to the transfer proceeds. This contrasts
with the requirements in IFRS 9. Under IFRS 9, if part of the consideration given or received is for
something other than the financial instrument, then a company does not measure the financial
instrument at its transaction price but instead at its fair value.
6.1 Initial measurement
6 Forthcoming requirements
Amendments to IFRS 16 introduce a new accounting model for variable payments
in sale-and-leaseback transactions entered into since 2019.

IFRS 16. 102A In September 2022, the IASB issued amendments to IFRS 16 Lease Liability in a Sale and Leaseback,
which are effective from 1 January 2024. The amendments do not introduce new requirements for
initial measurement of the right-of-use asset and lease liabilities arising from a sale-and-leaseback
transaction. On initial recognition, the seller-lessee measures the right-of-use asset as a proportion of
the carrying amount of the underlying asset and includes variable lease payments when it measures a
liability arising from a sale-and-leaseback transaction.
IFRS 16.IE11,12 However, the amendments have added a new illustrative example which clarifies that:
• a seller-lessee may adopt different approaches to determining the lease payments on initial
recognition; and
• the obligation to make variable payments over the term of the leaseback is a lease liability.
The amendments include examples illustrating two different approaches for determining the lease
payments. Both approaches ensure that the seller-lessee will not recognise any amount of the gain or
loss relating to the right of use retained. Examples 13 and 14 illustrate the two approaches.
Example 13 – Sale-and-leaseback transaction with variable payments: Expected lease

payments (Approach 1)
Company Z transfers an office building to Company Y for 900,000 (fair value of the office building at
the date of sale). Immediately before the transaction, the carrying amount of the building is 500,000.
At the same time, Z enters into a contract with Y for the right to use the building for six years, with
annual lease payments that comprise variable payments that do not depend on an index or rate.
The transfer of the office building qualifies as a sale under IFRS 15. Z’s incremental borrowing rate is
4% per annum.
Expected lease payments at the commencement date
Z assesses that although the lease payments are variable, it can make a reasonable estimate of the
lease payments for the term of the leaseback. Therefore, it determines the lease payments as the
amounts it expects to pay over the lease term as follows.
Year Lease payments

1 48,000
2 50,000
3 51,000
4 52,000
5 54,000
6 55,000
Z calculates that the present value of the lease payments discounted at its incremental borrowing
rate is 270,000.
At the commencement date, Z determines the proportion of the building transferred to Y that relates
to the right of use it retains. To do this, Z compares the present value of the expected lease payments
of 270,000 to the fair value of the building of 900,000. That is, Z calculates the proportion of the rights
retained as 270,000 / 900,000 x 100 = 30%. Using this percentage, Z calculates the initial carrying
amount of the right-of-use asset as 150,000 (30% × 500,000 (the previous carrying amount of the
building)).
Z notes that the gain on sale can be derived as a balancing figure. Alternatively, it can calculate it by
applying the percentage of the rights transferred (70%) to the gain that would have arisen in the
absence of the leaseback – i.e. the proceeds of 900,000 less the carrying amount of the building of
500,000. This gives a gain of 280,000 (70% × (900,000 - 500,000)).
At the commencement date, Z accounts for the sale-and-leaseback transaction as follows.
Debit Credit
Cash 900,000
Right-of-use asset (500,000 x 30%) 150,000
Building 500,000
Gain on sale-and-leaseback (70% x (900,000 − 500,000)) 280,000
The expected amortisation schedules for the lease liability and right-of-use asset are as follows.
Lease liability
Year Opening balance Lease payments(a) Interest expense(b) Closing balance
(4% p.a.)
1 270,000 (48,000) 10,800 232,800
2 232,800 (50,000) 9,312 192,112
3 192,112 (51,000) 7,684 148,796
4 148,796 (52,000) 5,952 102,748
5 102,748 (54,000) 4,110 52,858
6 52,858 (54,973) (c)
2,114 –
Right-of-use asset
Year Opening balance Depreciation(d) Closing balance
1 150,000 (25,000) 125,000
2 125,000 (25,000) 100,000
3 100,000 (25,000) 75,000
4 75,000 (25,000) 50,000
5 50,000 (25,000) 25,000
6 25,000 (25,000) –
Notes:
(a) Z reduces the carrying amount of the lease liability by the lease payments. These lease payments reflect the
expected lease payments that it estimated at the commencement date and which, when discounted, result in the
carrying amount of the lease liability at that date of 270,000.
(b) Z increases the carrying amount of the lease liability to reflect interest on the lease liability using the incremental
borrowing rate of 4% per annum.
(c) The estimated amount of 55,000 was adjusted to 54,973 for rounding purposes when preparing the lease
amortisation schedule.
(d) Z amortises the right-of-use asset on a straight-line basis over the lease term.
Example 14 – Sale-and-leaseback transaction with variable payments: Equal lease

payments over the lease term (Approach 2)
Equal lease payments over the lease term

Assume the fact pattern from Example 13 above, except that in this case Z does not believe it can
make a reasonable estimate of the expected lease payments.
Instead, Z assesses that it can determine the proportion of the rights retained under the leaseback
using another approach (see Section 3.3).
Z determines the proportion of the rights retained to be 33%. Using this percentage, it calculates that
the initial carrying amount of the right-of-use asset is 165,000 (33% × 500,000). Z also calculates the
gain arising on commencement of the sale-and-leaseback to be 268,000 (67% × (900,000 − 500,000)).
At the commencement date, Z accounts for the sale-and-leaseback transaction as follows.
Debit Credit
Cash 900,000
Right-of-use asset (500,000 x 33%) 165,000
Building 500,000
Gain on sale-and-leaseback (67% x (900,000 − 500,000)) 268,000
Z then determines the lease payments as the equal periodic payments over the lease term that,
when discounted using the 4% per annum incremental borrowing rate, result in the initial carrying
amount of the lease liability of 297,000. This gives a constant annual lease payment of 56,656.
The expected amortisation schedules for the lease liability and right-of-use asset are as follows.
Lease liability
Year Opening balance Lease payments(a) Interest expense(b) Closing balance
(4% p.a.)
1 297,000 (56,656) 11,880 252,224
2 252,224 (56,656) 10,089 205,656
3 205,656 (56,656) 8,226 157,226
4 157,226 (56,656) 6,289 106,859
5 106,859 (56,656) 4,274 54,477
6 54,477 (56,656) 2,179 0
Right-of-use asset
Year Opening balance Depreciation Closing balance
1 165,000 (27,500) 137,500
2 137,500 (27,500) 110,000
3 110,000 (27,500) 82,500
4 82,500 (27,500) 55,000
5 55,000 (27,500) 27,500
6 27,500 (27,500) 0
Notes:
(a) Z increases the carrying amount of the lease liability to reflect interest on the lease liability using the incremental
borrowing rate of 4% per annum.
(b) Z reduces the carrying amount of the lease liability with lease payments that reflect equal periodic payments
over the lease term. These payments, when discounted, result in the carrying amount of the lease liability at the
commencement date of 297,000.
What kinds of variable payments do the amendments capture?
The amendments do not distinguish between different types of variable payment. Instead, they
introduce a general requirement that when a seller-lessee applies the subsequent measurement
requirements for the lease liability, it does not recognise a gain or loss relating to the right of use it
retains under the leaseback.
In practice, the significance of the amendments may differ for different types of variable payment
and depend on how a company determined the lease payments at the commencement date.
For example, in a sale and leaseback of renewable power assets, it is possible that all of the lease
payments are variable – i.e. they depend on the output of the underlying asset. In these cases, it
will be important to ensure that the seller-lessee determines the lease payments and applies the
subsequent measurement requirements under the amendments.
Conversely, in a sale and leaseback of real estate in the retail sector, it is possible that there will
be a high proportion of fixed payments and only a small proportion of variable payments. In these
cases, a company may need to apply judgement in assessing whether it is acceptable to determine
the lease payments to be the fixed payments only. This may be appropriate if it expects the variable
payments to be very small.
6.2 Subsequent measurement
Why do the amendments include two approaches?
Including two approaches for subsequent measurement of sale-and-leaseback transactions appears

to be in response to stakeholder feedback on the IASB’s exposure draft (ED), which was more
prescriptive.
At the ED stage, the IASB had proposed a single approach of estimating expected variable
payments to measure the proportion of the previous carrying amount of the asset that relates to the
right of use retained by the seller-lessee. However, some stakeholders believed that this approach
would introduce a high degree of estimation uncertainty, particularly for long-term leases and/or in
unstable markets, because it would require companies to predict future payments.
The final amendments are less prescriptive and illustrate two approaches, but they retain the core
requirement that variable lease payments are included in a lease liability arising from a sale-and-
leaseback transaction.
Is the credit always a lease liability?
Yes. The credit that the seller-lessee recognises is a lease liability and is labelled as such in the new
illustrative examples. The credit represents an obligation to make payments in consideration for the
right to use the transferred asset, which is measured – and remeasured – under IFRS 16.
Previous literature did not specify that the credit was a lease liability. For example, IFRS 16 originally
labelled the credit as a financial liability, and the Committee’s agenda decision did not specify the
precise nature of the liability. Some Committee members expressed concern that if the credit were
specifically identified as a lease liability, then applying the subsequent measurement requirements
in IFRS 16 would result in inappropriate recognition of a gain.
The amendments clarify both that the credit is a lease liability and that the seller-lessee applies the
subsequent measurement requirements in IFRS 16 such that it does not recognise a gain or loss
associated with the right of use it retains.

IFRS 16. 102A Under the amendments, a seller-lessee will apply the subsequent measurement requirements for lease
liabilities such that it recognises no gain or loss on the right of use it retains.
IFRS 16. IE25 The difference between the actual lease payments made and the lease payments that reduce the
carrying amount of the lease liability are recognised in profit or loss.
Example 15 – Difference between actual and expected payments in profit or loss
Assume the same facts as in Example 13. On lease commencement, Z determined the lease
payments under the expected lease payments approach to calculate the lease liability (Approach 1).
The actual lease payments paid by Z over the lease term differ from the lease payments determined
on lease commencement. Therefore, Z recognises in profit or loss the difference between the lease
payments determined on lease commencement and its actual lease payments as follows.
Year Actual lease payments Lease payments Difference recognised

determined on in profit or loss
commencement Debit/(Credit)
1 46,000 48,000 (2,000)
2 47,000 50,000 (3,000)
3 52,500 51,000 1,500
4 54,000 52,000 2,000
5 52,000 54,000 (2,000)
6 50,000 55,000 (5,000)
If Z had used Approach 2 to determine the lease payments on lease commencement (as illustrated
in Example 14), the same principle would apply on subsequent measurement. That is, Z does not
reassess the lease liability if the expected variable lease payment changes after initial recognition
due to changes in expectations. The difference between actual and expected lease payments is
recognised in profit or loss as illustrated in the table above.
The remaining examples in this section illustrate how to apply the subsequent measurement
requirements to more complex scenarios. In each case, the core principles underlying the calculations
are that:
• the lease payments determined on lease commencement are not revised for changes in
expectations; and
• the seller-lessee does not recognise a gain or loss that relates to rights retained under the leaseback,
unless there is a partial or full termination.
Example 16 illustrates a lease modification and Example 17 illustrates a reassessment of the lease
term. In these examples, there is no partial or full termination and, therefore, the lease payments
determined on lease commencement are not revised for changes in expectations.
Example 18 illustrates a lease termination. In this example, a reduction in the rights retained results in a
gain being recognised in profit or loss.
Example 16 – Lease modification
IFRS 16.45(c) Company X transfers a power plant to Company B at fair value of 700,000. The carrying amount of
the power plant immediately before the transfer is 500,000. The transfer of the power plant qualifies
as a sale under IFRS 15. At the same time, X enters into a new contract with B for the right to use
the power plant for a period of five years with an option to terminate the lease after four years. X
determines that it is reasonably certain not to exercise the termination option, such that the lease
term is five years.
The lease payments include fixed and variable amounts depending on the output of the power plant.
X’s incremental borrowing rate is 3% per annum.
On lease commencement, X determines the lease payments using the expected lease payments
(Approach 1) for the five-year lease term as follows.
Year Fixed lease payment Variable lease payment

1 20,000 25,000
2 20,000 28,000
3 20,000 30,000
4 20,000 32,000
5 20,000 35,000
The present value of the fixed and estimated variable lease payments shown in the table above
discounted at X’s incremental borrowing rate of 3% is 228,336.
At the lease commencement date, X determines the proportion of the power plant transferred to B
that relates to the right of use it retains. To do this, X compares the present value of the expected
lease payments of 228,336 to the fair value of the power plant of 700,000. X calculates the proportion
of the rights retained as 32.6% (228,336 / 700,000 × 100). Using this percentage, X calculates the
initial carrying amount of the right-of-use asset as 163,097 (32.6% × previous carrying amount of the
power plant (500,000)).
At the lease commencement date, X accounts for the sale-and-leaseback as follows.
Debit Credit
Cash 700,000
Right-of-use asset (500,000 x 32.6%) 163,097
Power plant 500,000
Gain on sale-and-leaseback (67.4% x (700,000 − 500,000)) 134,761
At the end of Year 1, X and B modify the lease and agree that X will not be required to make fixed
lease payments in Year 2 and Year 3. At the same time, the termination option is removed from the
lease.
This is a lease modification that X does not account for as a separate lease. Instead, X remeasures
the lease liability using the revised lease payments and revised incremental borrowing rate and
adjusts the carrying amount of the right-of-use asset.
X’s incremental borrowing rate at the date of lease modification is 3.5% per annum. The pre-
modification carrying amount of the lease liability and right-of-use asset are 190,186 and 130,478.
To account for the lease modification, X determines which lease payments to include in the revised
lease liability. It notes that under the general measurement model for lease liabilities, it would not
include variable lease payments that depend on sales or usage. However, it also notes that:
• the lease liability arose in a sale-and-lease back transaction;
expectations;
• the lease modification does not change its obligation to make variable lease payments; and
• excluding the variable lease payments from the lease liability would result in recognition of a gain
associated with the rights retained under the leaseback.
Therefore, X revises the lease payments on remeasurement of the modified lease liability as follows.
Year Fixed lease payments Variable lease payments

1 – 28,000
2 – 30,000
3 20,000 32,000
4 20,000 35,000
X measures the revised lease liability by discounting the lease payments shown in the table above at
its revised incremental borrowing rate of 3.5%. This results in a lease liability of 149,889.
X recognises the difference between the carrying amounts of the lease liability before the
modification and the modified lease liability of 40,297 (190,186 − 149,889) as an adjustment to the
right-of-use asset. At the date of modification, X records the following journal entry.
Debit Credit
Example 17 – Change in lease term
Company C transfers a machine to Company D for 500,000, which is also the fair value of the
machine on the date of transfer. The carrying amount of the machine immediately before the transfer
is 400,000. The estimated useful life of the machine is 10 years. The transfer of the machine qualifies
as a sale under IFRS 15.
At the same time, C enters into a contract with D for the right to use the machine for a period of
four years. The lease payments include fixed payments of 25,000 per annum and variable amounts
depending on the units of production. C’s incremental borrowing rate is 4% per annum. The contract
also contains an option to renew the lease for an additional three years on the same payment terms.
However, C determines that it is not reasonably certain to exercise the renewal option at the lease
commencement date and, therefore, the lease term is four years.
C determines the fixed and variable lease payments under the expected lease payments approach as
follows.

1 25,000 20,000
2 25,000 22,000
3 25,000 24,000
4 25,000 26,000
The present value of the fixed and estimated variable lease payments shown in the table discounted
at C’s incremental borrowing rate of 4% is 173,879.
At the lease commencement date, C determines the proportion of the machine transferred to D that
relates to the right of use it retains. To do this, C compares the present value of the expected lease
payments of 173,879 to the fair value of the machine of 500,000 and calculates the proportion of
the rights retained as 34.8% (173,879/500,000 × 100). Using this percentage, C calculates the initial
carrying amount of the right-of-use asset as 139,103 (34.8% x the previous carrying amount of the
machine (400,000)).
At the lease commencement date, C accounts for the sale and leaseback of the machine as follows.
Debit Credit
Cash 500,000
Right-of-use asset (400,000 × 34.8%) 139,103
Machine 400,000
Gain on sale-and-leaseback (65.2% x (500,000 − 400,000)) 65,224
At the end of Year 2, changes in C’s production process require C to extend its use of the machine.
Therefore, it decides to exercise the renewal option and extend the lease term for another three-year
period. Its incremental borrowing rate at that date is 4.5% per annum.
The carrying amount of the lease liability and the right-of-use asset immediately before the exercise
of the renewal option are 94,268 and 69,552 respectively.
Exercising the renewal option is treated as a lease reassessment because the renewal option was
part of the original contract. C remeasures the lease liability incorporating the lease payments for the
remaining period of the revised lease term (using the revised discount rate) and adjusts the right-of-
use asset.
To do this, C needs to determine which lease payments to include in the revised lease liability. Under
the general measurement model for lease liabilities, C does not include variable lease payments that
depend on sales or usage. However, it notes that:
• the lease liability arose in a sale-and-leaseback transaction;
expectations;
• the lease reassessment does not change its obligation to make variable lease payments up to the
end of Year 4;
• excluding the variable lease payments up to the end of Year 4 from the lease liability would result
in recognising a gain associated with the rights retained under the leaseback;
• the variable lease payments in Years 5 to 7 do not relate to the rights retained when the sale and
leaseback was recognised initially; and
• the fixed lease payments in Years 5 to 7 will be included in the lease liability under the general
measurement model for lease liabilities.
Therefore, the lease payments included in remeasuring the lease liability are as follows.

3 25,000 24,000
4 25,000 26,000
5 25,000 –
6 25,000 –
7 25,000 –
C measures the revised lease liability by discounting the lease payments shown in the table above at
its revised incremental borrowing rate of 4.5%. This results in a lease liability of 156,525.
C recognises the difference between the carrying amount of the lease liability before the
reassessment and the carrying amount of the revised lease liability of 62,257 (156,525 - 94,268) as an
adjustment to the right-of-use asset. At the reassessment date, C records the following journal entry.
Debit Credit
Example 18 – Reduction in scope
Assume the fact pattern in Example 17 above, except that at the end of Year 1, Company C and
Company D decide to terminate the lease early – i.e. by the end of Year 3. This is because the
machine does not meet C’s production process specifications.
C’s incremental borrowing rate at the end of Year 1 is 4.5%.
At the end of Year 1, the carrying amount of the right-of-use asset is 104,328 and the lease liability is
135,834.
The original terms and conditions of the leaseback did not include a termination option. Therefore,
this is a lease modification that reduces the scope of the lease. At the date of the modification, C
remeasures the lease liability for the new lease term.
To do this, C needs to determine which lease payments to include in the revised lease liability. Under
the general measurement model for lease liabilities, C does not include variable lease payments that
depend on sales or usage. However, it notes that:
• the lease liability arose in a sale-and-leaseback transaction;
• the lease modification does not change C’s obligation to make variable lease payments up to the
end of Year 3;
• excluding the variable lease payments up to the end of Year 3 from the lease liability would result
in recognising a gain associated with the rights retained under the leaseback; and
• as a result of the lease modification, C has reduced the scope of the lease and no longer retains
the right to use the machine in Year 4.
Therefore, C recalculates the lease liability using:
• fixed and variable annual lease payments for Year 2 of 25,000 and 22,000 respectively, and for Year
3 of 25,000 and 24,000 respectively;
• a remaining lease term of two years; and
• a revised incremental borrowing rate of 4.5%.
C accounts for the partial termination of the lease by reducing the carrying amount of the right-of-
use asset and lease liability by one-third, reflecting the proportionate reduction in scope of the lease
(3 years - 2 years/ 3 years) and recognising any resulting gain or loss as follows.
Pre-modification Remaining carrying Difference (reduction of

carrying amount amount after one-third)
modification
(two-thirds)
Lease liability 135,834 90,496 (present value (45,338)
of two annual lease
payments of 47,000 and
49,000 discounted at the
original rate of 4%)
Right-of-use 104,328 69,552 (104,328 × (34,776)
asset 66.7%)
Gain on 10,562
modification
The difference of 649 between the remaining carrying amount of the lease liability after this step
(90,496) and the modified lease liability calculated at the revised discount rate (89,847) is recorded
as an adjustment to the right-of-use asset. This reflects the change in the consideration paid for the
lease and the revised discount rate.
What’s the purpose of the new subsequent measurement requirements?
The core objective of the new subsequent measurement requirements is to prevent inappropriate
recognition of gains or losses that do not arise from a transfer or other exchange transactions.
IFRS 16 contains clear requirements that on initial recognition of a sale-and-leaseback transaction a
seller-lessee recognises only the gain or loss on the rights transferred to the buyer-lessor. The seller-
lessee does not recognise a gain on the rights it retains.
Without the new requirements, a seller-lessee could have recognised a gain on the right of use it
retains solely because of a remeasurement – e.g. following a lease modification or a change in the
lease term. This could occur in a leaseback that includes lease payments that are excluded from
the lease liability under IFRS 16 – e.g. variable lease payments that do not depend on an index or
rate. A seller-lessee could have recognised a gain, even though no transaction or event would have
occurred to give rise to that gain.
Previously, IFRS 16 did not include any specific subsequent measurement requirements for
sale-and-leaseback transactions. These transactions often involve the sale of high value items
of property, plant and equipment with a long economic life. Because the accounting for these
transactions can have a long-term material effect on the financial position of seller-lessees, it
is important that they apply the requirements in IFRS 16 consistently to sale-and-leaseback
transactions, both on initial recognition and subsequently.
6.3 Effective date and transition

IFRS 16.C1D, C20E The amendments are effective for annual reporting periods beginning on or after 1 January 2024.
The amendments will apply retrospectively in accordance with IAS 8 to sale-and-leaseback transactions
entered into after the date of initial application of IFRS 16. The date of initial application is the beginning
of the annual reporting period in which IFRS 16 was first applied by a company.
A company may apply the amendments early but, if it does, it discloses that fact.
Example 19 – Sale and leaseback entered into under IFRS 16
Company ABC applied IFRS 16 with a date of initial application of 1 January 2019. In February 2019,
Company ABC transferred a retail store (at fair value) and leased it back for 10 years. The payments
under the leaseback were fully variable based on the sales volume. ABC determined that the
conditions for a sale under IFRS 15 were met.
In its 2019 financial statements, ABC accounted for the transaction as a sale and leaseback.
However, because the lease payments varied with sales volume, it measured the lease liability and
the right-of-use asset at zero under paragraph 27(b) of IFRS 16. Consequently, ABC recognised the
full gain on the sale as the difference between the fair value and the carrying amount of the retail
store.
In its 2020 financial statements, ABC amended its accounting for the transaction to reflect the
additional insights provided by the explanatory material included in the Committee’s November 2020
agenda decision. Applying this retrospectively, ABC measured the right-of-use asset as a proportion
of its previous carrying amount, reduced the gain on the sale leg to reflect the rights transferred to
the buyer-lessor and recognised an ’other liability’. ABC began to amortise this liability in profit or loss
on a straight-line basis over the term of the leaseback.
Under the amendments, ABC will reassess this sale-and-leaseback transaction retrospectively
from February 2019. ABC will not necessarily adjust the initial carrying amount of the lease
liability recognised when it amended its accounting for the transaction to reflect the Committee’s
November 2020 agenda decision. However, it reviews its subsequent accounting to ensure that it
has not recognised in profit or loss any amount of the gain or loss relating to the right of use retained
when remeasuring the lease liability.
6.3 Effective date and transition
Example 20 – Sale and leaseback entered into under IAS 17
IFRS 16.C16–18 In 2015, Company XYZ sells a wind farm and leases it back for 15 years. The payments under the
leaseback are fully variable and depend on the quantity of electricity generated by the wind farm. XYZ
has the right to repurchase the wind farm after 10 years. It accounts for the transaction as a sale and
operating leaseback under IAS 17 and recognises a gain on the date of disposal.
XYZ notes that if it had entered into the transaction after the date of initial application of IFRS 16, it
would be required to assess whether the transfer of the asset met the conditions to be a sale under
IFRS 15. XYZ notes that the transaction would fail this test because it has a repurchase option –
i.e. it would be a failed sale. If it had entered into the transaction after the date of initial application of
IFRS 16, XYZ would have applied IFRS 9.
However, when XYZ first applied IFRS 16 in 2019, in accordance with the general transition
requirements in IFRS 16, it did not reassess whether the transaction was a sale and leaseback.
Instead, it applied the transition requirements in IFRS 16 to the leaseback. XYZ measures the right-
of-use asset and lease liability at zero because the lease payments depend on sales or usage, and it
need not make any further accounting adjustment on applying the amendments.
Which transactions will a seller-lessee need to reassess?
For many seller-lessees, the amendments will affect only those sale-and-leaseback transactions
that include variable lease payments and that have occurred since 2019.
A seller-lessee is required to reassess sale-and-leaseback transactions it entered into after the initial
application of IFRS 16. The amendment applies to all sale-and-leaseback transactions occurring after
the initial application of IFRS 16 (1 January 2019 for many seller-lessees). However, it is expected to
affect only those that include variable lease payments.
Is it necessary to restate sale-and-leaseback transactions entered into under IAS 17?
No. The amendments will apply retrospectively under IAS 8 to sale-and-leaseback transactions
entered into after the date of initial application of IFRS 16.
In our view, the amendments will have no practical impact on sale-and-leasebacks entered into
under IAS 17. This is because the transition guidance for the amendments needs to be read in
conjunction with the original transition guidance for sale-and-leasebacks in paragraphs C16 to C18
in IFRS 16. Under the original transition requirements for sale-and-leasebacks (paragraph C13 of
IFRS 16), a seller-lessee:
• does not reassess whether an existing sale-and-leaseback qualifies for sale-and-leaseback
accounting on transition; and
• does not apply the partial gain recognition approach to sale-and-leaseback transactions entered
into before the date of initial application.
If a seller-lessee did not apply paragraph 100 of IFRS 16 – or restate the gain on sale – for its sale-
and-leaseback transactions before initial application of IFRS 16, then in our view the amendments
do not apply to these transactions.
Appendix I: IFRS 16 at a glance

Topic Key facts
Lease definition • New lease definition with an increased focus on control over the use of
the underlying asset
Lessee accounting • Single lease accounting model

model
• No lease classification test
• Most leases on-balance sheet:
- lessee recognises a right-of-use asset and lease liability
- treated as the purchase of an asset on a financed basis
Lessor accounting • Dual lease accounting model for lessors

model
• Lease classification test based on IAS 17 Leases classification criteria
• Finance lease accounting model based on IAS 17 finance lease
accounting, with recognition of net investment in lease comprising lease
receivable and residual asset
• Operating lease accounting model based on IAS 17 operating lease
accounting
Practical expedients • Optional lessee exemption for short-term leases – i.e. leases for which
and targeted relief the lease term as determined under IFRS 16 is 12 months or less and
that do not contain a purchase option
• Portfolio-level accounting permitted for leases with similar characteristics
if the effect on the financial statements does not differ materially from
applying the requirements to individual leases
• Optional lessee exemption for leases of low-value items – e.g. underlying
assets with a value of USD 5,000 or less when they are new – even if
they are material in aggregate
Effective date • Accounting periods beginning on or after 1 January 2019

• Early adoption is permitted if IFRS 15 Revenue from Contracts with
Customers is also adopted
• Date of initial application is the beginning of the first annual reporting
period in which a company first applies the standard
Appendix II: List of examples 39
Appendix II: List of examples

Title Section
Example 1 – The transfer is a sale 2.1
Example 2 – The transfer is not a sale 2.1
Example 3 – Sale and leaseback of land and buildings 2.2
Example 4 – Lessee controls an asset under construction 2.3
Example 5 – Old sale-and-leaseback transaction that would be a failed sale under IFRS 16 2.4
Example 6 – Sale-and-leaseback transaction is a sale with on-market terms 3.1
Example 7 – Sale-and-leaseback transaction is a sale with off-market terms 3.2
Example 8 – Sale-and-leaseback transaction with variable payments 3.3
Example 9 – On-market sale-and-leaseback transaction 4.1
Example 10 – Sale-and-leaseback transaction in a sale with off-market terms 4.2
Example 11 – Sale-and-leaseback transaction is a failed sale 5.1
Example 12 – Determining contractual cash flows for a failed-sale financial liability in a 5.2
sale-and-leaseback arrangement
Example 13 – Sale-and-leaseback transaction with variable payments: Expected lease 6.1

payments (Approach 1)
Example 14 – Sale-and-leaseback transaction with variable payments: Equal lease 6.1

payments over the lease term (Approach 2)
Example 15 – Difference between actual and expected payments in profit or loss 6.2
Example 16 – Lease modification 6.2
Example 17 – Change in lease term 6.2
Example 18 – Reduction in scope 6.2
Example 19 – Sale and leaseback entered into under IFRS 16 6.3
Example 20 – Sale and leaseback entered into under IAS 17 6.3
About this publication

This publication has been produced by the KPMG International Standards Group (part of KPMG
IFRG Limited). This edition considers the requirements of IFRS 16 Leases published by the IASB in
January 2016 and amended in September 2022.
The text of this publication refers to IFRS 16 and to selected other current standards in issue at
1 January 2023. Further analysis and interpretation will be needed for a company to consider the
impact of IFRS 16 in light of its own facts, circumstances and individual transactions. The information
contained in this publication is based on initial observations developed by the KPMG International
Standards Group and these observations may change. Accordingly, neither this publication nor any of
our other publications should be used as a substitute for referring to the standards and interpretations
themselves.
Acknowledgements 41

Acknowledgements
We would like to acknowledge the efforts of the following members of the KPMG International
Standards Group, who were the principal authors of this publication: Divya Gaur, Ed Haygarth,
Madison (Gahyun) Ji and Brian O’Donovan.
We would also like to thank the members of the KPMG global IFRS leases topic team for their
contribution:
Kimber Bascom (leader) US
Judit Boros Hungary
Yen San Chan Singapore
Úna Curtis Ireland
Jake Green UK
Scott Muir US
Brian O’Donovan (deputy leader) UK
Emmanuel Paret France
Frank Richter Switzerland
Marcio Rost Brazil
Volker Specht Germany
Patricia Stebbens Australia
Mag Stewart Canada
Alwyn Van Der Lith South Africa
Beth Zhang China
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Publication name: Sale and leaseback – For lessees and lessors
Publication number: 137836
Publication date: February 2023
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Sale and

Transfer1 to buyer-lessor is a • Derecognise the underlying • Recognise the underlying

Transfer to buyer-lessor is not • Continue to recognise the • Do not recognise the

2.1 Is there a sale?

Sale and leaseback

Seller-lessee transfers underlying asset

Is the transfer of an underlying asset a sale

Sale Failed sale

Sale and leaseback transaction Financing arrangement

Example 1 – The transfer is a sale

Example 2 – The transfer is not a sale

What might commonly preclude a transfer from being a sale?

Can you have a sale and finance leaseback?

IFRS 16.BC262(a) Technically, yes, but it is expected to be rare.

Does a failed sale need to be reassessed?

Does the legal form of the transfer matter?

2.2 Unit of account

Example 3 – Sale and leaseback of land and buildings

Consider an example where Company B transfers a 10-storey building to Company C and

Can you have a sale and leaseback of a commodity?

Can you have a sale and leaseback of a digital asset?

2.3 Lessee controls an asset

Example 4 – Lessee controls an asset under construction

How does a lessee assess whether sale-and-leaseback accounting is required when

2.4 Old sale-and-leaseback transactions

Example 5 – Old sale-and-leaseback transaction that would be a failed sale under

Is it possible to align the accounting treatment of old and new sale-and-leasebacks?

Does a seller-lessee reassess an old sale-and-leaseback transaction if it is modified

3.1 Accounting model for lessees

Accounting for the seller/lessee

Transfer to buyer-lessor is not • See Section 5.

Example 6 – Sale-and-leaseback transaction is a sale with on-market terms

Is it possible to still achieve off-balance sheet accounting for a sale-and-leaseback?

Do IFRS 16’s recognition exemptions apply to the leaseback?

The recognition exemptions cover:

3.2 Adjusting for off-market terms

Is it always necessary to adjust for off-market terms?

Example 7 – Sale-and-leaseback transaction is a sale with off-market terms

3.3 Leaseback with variable payments

Example 8 – Sale-and-leaseback transaction with variable payments

C recognises the transaction as follows.

Can the right-of-use asset be zero in a leaseback with variable payments?

Is the resulting credit necessarily a lease liability?

4.1 Accounting model for lessors

Accounting for the buyer-lessor

Transfer is not a sale • See Section 5.

Example 9 – On-market sale-and-leaseback transaction

Assume the same facts as in Example 6.

D then applies IFRS 16’s lessor accounting model to the leaseback.

Do lessors apply the lease classification test?

4.2 Adjusting for off-market terms

Example 10 – Sale-and-leaseback transaction in a sale with off-market terms

Assume the same facts as in Example 7.

5 Accounting for failed sales

5.1 Basic requirement

Example 11 – Sale-and-leaseback transaction is a failed sale

5.2 More complex scenarios

Example 12 – Determining contractual cash flows for a failed-sale financial liability

Date Annual payment Interest Carrying amount of liability