Sale-and-Leaseback as a financing tool: our guide

Looking for an alternative capital source if conventional financing is limited? Find out why companies with substantial fixed assets are choosing sale-and-leaseback arrangements. What are the key considerations, accounting treatment and practical challenges? 

A sale-and-leaseback occurs when an entity (the seller-lessee) sells an asset to another party (the buyer-lessor) and simultaneously leases the asset back for a specified period. The transaction involves two linked contracts: a sale and purchase agreement, and a lease agreement.

These transactions can unlock capital while allowing continued use of critical assets. But determining whether a transaction qualifies as a sale-and-leaseback, and accounting for it correctly, needs careful application of IFRS. Most relevant are IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases.

The critical question in accounting for such arrangements is whether the transfer of the asset qualifies as a sale.

If it does, the transaction is accounted for as a sale-and-leaseback under IFRS 16. If not, it is treated as a financing arrangement under IFRS 9, Financial Instruments.

How should you assess if it counts as a sale?

The key point is whether the control of the underlying asset transfers to the buyer-lessor in accordance with IFRS 15. Both parties (seller-lessee and buyer-lessor) must independently decide whether the transfer qualifies as a sale.

Several contractual features may determine that it doesn’t:

• A substantive repurchase option (call or forward option) held by the seller-lessee

• A leaseback containing a fixed-price renewal option that the seller-lessee is reasonably certain to exercise, extending the lease to cover substantially all the asset’s remaining useful life

• A put option with an exercise price higher than both the original selling price and the expected market value of the asset

• Classification of the leaseback as a finance lease by the buyer-lessor.

Crucially, a transaction qualifies as a sale-and-leaseback only if the seller-lessee controlled the asset before its transfer to the buyer-lessor. IFRS 16 paragraphs B45–B47 clarify that obtaining legal title alone does not determine the accounting outcome.

If these conditions are not met, the transaction is not a sale-and-leaseback and must instead be accounted for as a financing arrangement.

Measurement Principle: How to account for a sale-and-leaseback transaction

Initial Measurement

Once a transfer qualifies as a sale, the accounting depends on whether the transaction is conducted at market terms.

For a transaction at market terms:

Example 1 – At market terms (As derived in KPMG’s February 2023 Sales and Leaseback article)

Company C sells a building to Company D for CU 1,000,000, equal to its fair value. The building’s carrying amount is CU 500,000. Company C leases the building back for 15 years, with annual lease payments of CU 80,000 payable in arrears. The implicit lease rate is 5%, resulting in a present value of lease payments of CU 830,400.

Analysis

The ROU asset is measured as:

CU 500,000 × (830,400 / 1,000,000) = CU 415,200

The total gain on sale is CU 500,000, of which:

• CU 415,200 relates to the right of use retained by Company

• CU 84,800 relates to the rights transferred to Company D

Accordingly, Company C recognises a gain of CU 84,800.

What if transactions are not at fair value?

IFRS 16 paragraphs 101–102 refer to required adjustments when either the sale price or lease payments are not at market terms:

• Below-market terms are treated as a prepayment of lease payments

• Above-market terms are treated as additional financing provided by the buyer-lessor

The adjustment is measured using the more easily determinable of:

• the difference between the asset’s fair value and the consideration received, or

• the difference between the present value of contractual lease payments and market-rate lease payments

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Example 2 – Off market terms  (As derived in KPMG’s February 2023 Sales and Leaseback article)

Company C sells a building for CU 1,000,000 when its fair value is CU 900,000. The lease terms are otherwise unchanged from Example 1. 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.

Analysis

The ROU asset is measured as:

CU 500,000 × (730,400 / 900,000) = CU 405,778

The total gain on sale is CU 400,000, of which:

• CU 324,622 relates to the right of use retained by Company C

• CU 75,378 relates to the rights transferred to Company D

Subsequent Measurement

After initial recognition, the seller-lessee applies:

• IFRS 16 paragraphs 29–35 to the ROU asset, and

• IFRS 16 paragraphs 36–46 to the lease liability

Lease payments are determined so that no gain or loss relating to the retained right of use is recognised at a later date.

What if transactions involve variable lease payments?

Amendments to IFRS 16 (effective from 1 January 2024) address the accounting for sale-and-leaseback transactions where there are variable lease payments. There are different scenarios for variable payments that are not indexed and those that depend on an index or rate.

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Example 3 – Variable payments not indexed rate (As derived in KPMG’s February 2023 Sales and Leaseback article)

Company A sells a building to Company B for CU 900,000, equal to its fair value. The building’s carrying amount is CU 500,000. Company A leases the building back for six years, with lease payments comprising fixed payments and variable payments that do not depend on an index or a rate. The implicit lease rate is 4%, resulting in a present value of estimated lease payments of CU 270,000.

Analysis

The right-of-use asset is measured as:

CU 500,000 × (270,000 / 900,000) = CU 150,000

The total gain on sale is CU 400,000, of which:

• CU 120,000 relates to the right of use retained

• CU 280,000 relates to the rights transferred

Accordingly, Company A recognises a gain of CU 280,000.

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Example 4 – Variable payments dependent on an index or rate (As derived in KPMG’s February 2023 Sales and Leaseback article)

Consistent with Example 3, Company A is unable to reasonably estimate the expected lease payments at the commencement date. Company A sells a building to Company B for CU 900,000, equal to its fair value. The building’s carrying amount is CU 500,000. Company A leases the building back for six years, with lease payments that are variable and depend on an index or a rate. The implicit lease rate cannot be readily determined and the present value of lease payments cannot be reasonably estimated at the commencement date.

Analysis

Company A estimated 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%x500,000), being the proportion of the previous carrying amount of the asset relating to the right of use retained.

The total gain on sale is CU 400,000, of which:

• CU 132,000 relates to the right of use retained

• CU 268,000 relates to the rights transferred

Accordingly, Company A recognises a gain of CU 268,000.

What are the benefits of sale-and-leaseback transactions?

Despite their complexity, sale-and-leaseback arrangements offer several advantages:

• Liquidity generation: frees up capital for reinvestment

• Improved financial ratios: replacement of owned assets with ROU assets and lease liabilities often leads to lower reported balances

• Flexible financing: effectively finances 100% of the asset, with lease terms tailored to operational needs

• Potential tax benefits: depending on jurisdiction, lease payments may reduce taxable income.

How to prepare for an audit

As sale-and-leasebacks are complicated and involve judgement, they are a key focus area for audits. Auditors typically expect management to:

• Fully understand and document the transaction’s structure and key terms

• Prepare a detailed accounting memo supporting the assessment under IFRS 15 and IFRS 16

• Avoid common pitfalls, including:
  
  • Incorrect assessment of control transfer
  
  
  • recognition of the full gain, not only the transferred portion
  
  
  • failure to adjust for off-market terms.

Management should also consider disclosure requirements under IFRS 16 paragraph B52, including the rationale for entering into sale-and-leaseback transactions, key terms, excluded payments, and cash flow effects.

How we can help

Sale‑and‑leaseback transactions can offer powerful financing benefits, but the accounting requirements under IFRS are complex. Determining whether a transfer qualifies as a sale, adjusting for off‑market terms, and applying the correct measurement principles all require careful analysis to avoid errors.

We can help you understand these requirements and prepare robust accounting assessments for your sale‑and‑leaseback arrangements. Our Financial Accounting Advisory Services team provides clear, practical support to help you navigate the technical issues, document your judgements, to help ensure full IFRS compliance.

Whether you are considering a sale‑and‑leaseback as a source of capital or need assistance preparing for audit, we can help.

For more information or to schedule a consultation, please contact our experts, Imogen Massey and Christelle Limjap.