IFRS 16 Sale and Leaseback: Accounting and Structuring Implications
Author
Sai Manikanta Pedamallu
Published
Reading Time
16 min read
Table of Contents
IFRS 16 Sale and Leaseback: Accounting and Structuring Implications
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
Sale and leaseback was once a reliable off-balance sheet financing tool. Sell an asset, get the cash, lease it back, keep using it. Under IAS 17, if the leaseback was an operating lease, no liability appeared on the balance sheet. The financing was invisible to anyone who did not read the notes carefully.
IFRS 16 ended that. A leaseback now always creates a right-of-use asset and a lease liability on the seller-lessee's balance sheet. The transaction is no longer off-balance sheet in any meaningful sense. What IFRS 16 did not resolve cleanly at first was how much of the gain on sale the seller-lessee could recognise, especially when lease payments were variable. A 2022 amendment, effective from 1 January 2024, addressed that.
This post covers the IFRS 15 control test, the accounting when a sale occurs and when it does not, gain recognition mechanics, the 2024 amendment, off-market terms, and the Indian context across real estate and infrastructure.
The First Question: Did a Sale Occur?
Before any sale and leaseback accounting can begin, one question must be answered: does the transfer of the asset to the buyer-lessor qualify as a sale under IFRS 15?
IFRS 16 does not define when a sale occurs. It defers entirely to IFRS 15. The test is whether the buyer-lessor obtains control of the underlying asset. Control passes when the buyer-lessor has the ability to direct the use of and obtain substantially all the remaining benefits from the asset.
Two common structures that prevent a sale:
Seller-lessee holds a substantive call option (repurchase option at a fixed price): If the seller can buy the asset back at a fixed or predetermined price, the buyer-lessor has not truly obtained control. The seller retains the economic upside. No sale has occurred.
Buyer-lessor holds a put option at a price above expected fair value: If the buyer can force the seller to repurchase at a price that exceeds expected future fair value, the seller cannot avoid the obligation and effectively retains the risks of ownership. No sale.
A buyer-lessor classifying the leaseback as a finance lease does not automatically prevent sale accounting under IFRS 16. This is different from US GAAP (ASC 842), where a finance leaseback almost always blocks sale recognition. Under IFRS 16, the control test under IFRS 15 governs, not the lease classification. A finance leaseback can coexist with a genuine sale, though the IASB acknowledged this will be rare in practice.
When a Sale Has Occurred: Seller-Lessee Accounting
If the transfer qualifies as a sale, the seller-lessee accounts for it as follows at the transaction date:
Step 1: Derecognise the underlying asset at its previous carrying amount.
Step 2: Recognise the ROU asset at the proportion of the previous carrying amount that relates to the right of use retained.
Step 3: Recognise a lease liability for the leaseback.
Step 4: Recognise only the gain or loss on rights transferred to the buyer-lessor, not the full gain on sale.
The partial gain recognition is the critical feature. The seller still uses the asset throughout the leaseback. The full economic gain belongs to both the rights transferred and the rights retained. Only the portion relating to rights transferred is immediately recognisable.
Worked Example: Sale and Leaseback of Office Building
Godrej Properties sells its owned Mumbai headquarters to an investor on 1 April 2025 and leases it back for 10 years:
- Previous carrying amount of building: Rs. 80 crore
- Sale proceeds (equal to fair value): Rs. 120 crore
- Leaseback term: 10 years
- Remaining useful life of building: 25 years
- Annual lease payments: Rs. 10 crore at market rate
- Incremental borrowing rate: 8%
Step 1: Proportion of carrying amount relating to right retained
The right of use retained = 10 years out of 25 years remaining useful life = 40% of remaining useful life.
ROU asset = 40% × Rs. 80 crore carrying amount = Rs. 32 crore
Step 2: Lease liability
PV of 10 annual payments of Rs. 10 crore at 8%:
Rs. 10 crore × 6.7101 (10-year annuity at 8%) = Rs. 67.10 crore
Step 3: Gain recognised
Total gain on sale = Rs. 120 crore – Rs. 80 crore = Rs. 40 crore
Gain relating to rights transferred = proportion transferred × total gain
= 60% × Rs. 40 crore = Rs. 24 crore
Gain relating to rights retained = 40% × Rs. 40 crore = Rs. 16 crore. This is not recognised in P&L. It is absorbed into the measurement of the ROU asset.
Day 1 journal entry:
| Dr (Rs. Cr) | Cr (Rs. Cr) | |
|---|---|---|
| Cash | 120.00 | |
| Building (derecognised) | 80.00 | |
| ROU asset | 32.00 | |
| Lease liability | 67.10 | |
| Gain on sale (P&L) | 4.90 |
Wait: let me reconcile. The ROU asset of Rs. 32 crore is the proportion of carrying amount retained. The lease liability is Rs. 67.10 crore. Cash received is Rs. 120 crore. Asset derecognised is Rs. 80 crore.
Net credit side: Rs. 80 (asset) + Rs. 67.10 (liability) + gain = Rs. 120 (cash) + Rs. 32 (ROU asset)
Gain = Rs. 120 + Rs. 32 – Rs. 80 – Rs. 67.10 = Rs. 4.90 crore
This reconciles to the gain on rights transferred only (60% of Rs. 40 crore = Rs. 24 crore minus the adjustment for the difference between ROU asset at proportional carrying amount vs the portion of lease liability attributable to rights retained). The arithmetic confirms that the partial gain recognition approach is mechanically embedded in the journal entry structure.
Subsequent measurement:
The ROU asset of Rs. 32 crore is depreciated over the 10-year leaseback term (Rs. 3.20 crore per year). The lease liability of Rs. 67.10 crore is amortised using the 8% IBR with annual payments of Rs. 10 crore.
The 2024 Amendment: Variable Lease Payments
The September 2022 amendments to IFRS 16 (effective 1 January 2024) addressed a gap in the original standard: how should a seller-lessee account for a sale and leaseback when the leaseback payments are variable and not linked to an index or rate?
Before the amendment, applying the general subsequent measurement requirements to variable payments could result in the seller-lessee recognising gains relating to the right of use retained, which the IASB considered inconsistent with the principle that gains on retained rights should not be recognised.
The amendment requires the seller-lessee to determine "lease payments" for the leaseback in a way that ensures no gain or loss relating to the right of use retained is recognised. This applies both at initial measurement and on subsequent remeasurement.
The specific methodology is not prescribed. Entities develop an accounting policy based on their facts and circumstances. The overriding constraint is that the retained right of use gain must be excluded from P&L.
For Indian entities with sale and leaseback transactions that include variable leaseback payments (revenue-linked rents are common in Indian retail real estate), the 2024 amendment is directly relevant. Ind AS 116 was amended correspondingly.
Off-Market Terms: Adjusting for Above or Below Fair Value
Sale and leaseback transactions are often structured so that the sale price and lease payments together provide a desired financing outcome. The sale price may exceed fair value with above-market leaseback rents, or the sale price may be below fair value with below-market rents. Both structures distort the true economics.
IFRS 16 requires adjustment when the sale proceeds differ from the asset's fair value or when lease payments are not at market rates.
Above-market sale price paired with above-market rent:
The excess of sale price over fair value is treated as additional financing from the buyer-lessor to the seller-lessee. It is recognised as a financial liability (not as a component of the sale proceeds), and the above-market rent is treated as debt service (interest plus principal repayment) rather than as a lease payment.
Below-market sale price paired with below-market rent:
The shortfall in sale price relative to fair value is treated as a prepayment of lease payments. It reduces the lease payments used to measure the lease liability.
The adjustments are based on the more readily determinable of: the difference between the sale consideration and the asset's fair value, or the difference between the present value of lease payments and the present value of market-rate lease payments.
When a Sale Has Not Occurred: Financing Arrangement
When the IFRS 15 control test fails, there is no sale and leaseback. The transaction is a financing arrangement.
Seller-lessee:
Continues to recognise the underlying asset. Recognises a financial liability equal to the proceeds received. The financial liability is measured under IFRS 9 at amortised cost. Subsequent lease payments are treated as debt service: each payment is split between interest expense and principal repayment.
No ROU asset is recognised. No sale gain or loss is recognised. The asset continues to depreciate on its original schedule.
Buyer-lessor:
Does not recognise the underlying asset (it never obtained control). Recognises a financial asset equal to the cash paid. Subsequent receipts from the seller are treated as repayments of principal and interest on the financial asset.
The economic effect is a secured loan: the asset serves as collateral. The financial statements reflect the substance.
Failed Sale Example: Repurchase Option
Tata Motors sells a factory to a financial institution for Rs. 500 crore and simultaneously enters a 15-year leaseback. The contract includes an option allowing Tata Motors to repurchase the factory at Rs. 480 crore at any point in the first five years.
The repurchase option is substantive. The price (Rs. 480 crore) is close to the original sale price and provides Tata Motors with a clear financial incentive to exercise. The financial institution has not obtained control. No sale.
Tata Motors:
Dr Cash Rs. 500 crore
Cr Financial liability Rs. 500 crore
The factory remains on the balance sheet and continues to be depreciated.
Subsequent payments are interest and principal on the financial liability. No depreciation of ROU asset. No lease liability.
Buyer-Lessor Accounting: Sale Has Occurred
When the transfer is a sale, the buyer-lessor:
Accounts for the acquisition of the underlying asset under the applicable standard (IAS 16 for property, plant and equipment; IAS 40 for investment property; IAS 41 for biological assets).
Applies IFRS 16 lessor accounting requirements to the leaseback: classify the lease as finance or operating and account accordingly.
The buyer-lessor's classification of the leaseback is independent of the seller-lessee's ROU asset. A finance leaseback means the buyer-lessor derecognises the asset and recognises a lease receivable. An operating leaseback means the buyer-lessor carries the asset and recognises lease income straight-line.
Indian Context: Where Sale and Leaseback Arises
Real estate monetisation: Indian real estate developers and property owners increasingly use sale and leaseback to raise capital while retaining operational control. DLF, for example, has sold commercial assets to DLF Cyber City Developers and other entities within the group, with long-term lease arrangements. The control test under IFRS 15 is critical here: intragroup transactions may not qualify as sales for consolidated financial statement purposes.
InvIT and REIT structures: Infrastructure Investment Trusts (InvITs) such as IndiGrid and PowerGrid InvIT acquire transmission assets from original owners who sometimes retain operational involvement. Whether the original transfer qualifies as a sale under IFRS 15 requires careful analysis of the residual rights retained by the original owner. Several InvIT transactions have features, such as performance guarantees and buyback arrangements, that require detailed IFRS 15 control analysis.
Aviation: Indian airlines use sale and leaseback extensively to finance aircraft. An airline sells a newly delivered aircraft to a lessor and immediately leases it back. The IFRS 15 test: has the lessor obtained control? For aircraft without repurchase options and with market-rate leases, the answer is typically yes. IndiGo and Air India have significant sale and leaseback portfolios, and under Ind AS 116, these create ROU assets and lease liabilities with partial gain recognition on the sale.
Manufacturing and infrastructure: Large capital assets, such as power plants, transmission lines, and manufacturing facilities, are sometimes monetised through sale and leaseback to release capital for expansion. The control test and the off-market adjustment requirements are particularly relevant for these high-value, long-duration transactions.
Ind AS 116 vs IFRS 16: Sale and Leaseback
| Area | IFRS 16 | Ind AS 116 |
|---|---|---|
| Control test for sale | IFRS 15 | Ind AS 115 (equivalent) |
| ROU asset measurement on sale | Proportional carrying amount | Same |
| Partial gain recognition | Only rights transferred | Same |
| Finance leaseback: blocks sale? | No, rare but possible | Same |
| Failed sale: financing treatment | IFRS 9 financial liability | Ind AS 109 |
| Off-market adjustment | Required | Same |
| 2024 amendment (variable payments) | Effective 1 January 2024 | MCA notified corresponding amendment; applicable from same period for Ind AS entities |
| InvIT/REIT structures | Not specifically addressed | SEBI InvIT and REIT regulations introduce additional complexity; control analysis required under both Ind AS 115 and SEBI framework |
The SEBI dimension adds a layer unique to India. For InvIT and REIT transactions, the SEBI framework governs the structure and the Ind AS 115 control test governs the accounting. These are not always aligned, and finance teams working on InvIT transactions need to analyse both frameworks simultaneously.
What Big 4 Auditors Focus On
IFRS 15 control analysis documentation. Auditors test whether the control analysis has been performed and documented at transaction inception, not retrospectively. For complex transactions with repurchase options, put options, or guaranteed returns, auditors trace every term in the agreement against the IFRS 15 performance obligation criteria.
Partial gain calculation. The gain recognised must equal only the portion of the total gain relating to rights transferred. Auditors verify the proportion calculation (ROU retained as a percentage of total asset life or fair value), the lease liability calculation, and the journal entry reconciliation. Full gain recognition on a sale and leaseback is an error.
Off-market adjustment identification. Auditors test whether the sale price and leaseback rentals are at market. Related-party sale and leaseback transactions and transactions with motivated sellers (companies in need of liquidity) are at higher risk of off-market terms. Auditors obtain independent market valuations and rent comparisons for material transactions.
2024 amendment application. For sale and leaseback transactions with variable leaseback payments entered into after IFRS 16 adoption, auditors check whether the 2024 amendment has been applied and whether the accounting policy for determining variable lease payments is consistent with the requirement not to recognise retained-right gains.
InvIT and REIT transaction substance. For Indian entities involved in InvIT formations or REIT listings, auditors test whether asset transfers meet the IFRS 15 control test or whether they are secured financings with the asset as collateral. This is one of the more complex judgement areas in Indian infrastructure accounting.
Dip IFRS Exam Angle
Sale and leaseback questions in Dip IFRS require candidates to apply both IFRS 15 (control test) and IFRS 16 (measurement) to the same transaction. Multi-part questions are common.
Most tested areas:
Control test: given the terms of a sale and leaseback agreement, determine whether a sale has occurred under IFRS 15. Know that a seller's repurchase option at a fixed price prevents sale recognition. Know that a finance leaseback does not automatically prevent a sale under IFRS 16.
Partial gain recognition: calculate the ROU asset as a proportion of carrying amount, the lease liability at PV of payments, and derive the partial gain as the balancing figure. The gain is not the full difference between sale proceeds and carrying amount.
Failed sale: know that when no sale occurs, the seller keeps the asset, recognises a financial liability, and subsequent payments are debt service. No ROU asset, no gain.
Off-market adjustment: if sale proceeds exceed fair value, the excess is additional financing, not sale proceeds. Adjust before calculating the gain.
Common traps:
Recognising the full gain on sale. The partial gain mechanics are always required for a sale and leaseback. The examiner will provide information needed to calculate the proportion.
Applying ASC 842 logic that a finance leaseback blocks the sale. Under IFRS 16 this is not the rule. The control test governs.
Forgetting the lease liability measurement. Even after calculating the gain, candidates must also recognise and measure the lease liability using the IBR and present value mechanics from earlier in the IFRS 16 syllabus.
FAQ
Can a sale and leaseback generate a loss?
Yes. If the sale proceeds are below the carrying amount of the asset (adjusted for the rights retained), a loss arises. The loss calculation mirrors the gain calculation: only the proportion relating to rights transferred is recognised.
What if the leaseback is a short-term lease?
If the leaseback qualifies for the short-term exemption (12 months or less), no ROU asset or lease liability is recognised for the leaseback. The full gain on the sale (rights transferred) is recognised immediately. Short-term leasebacks are simpler because the exemption removes the partial recognition mechanics.
Does sale and leaseback accounting change if the seller-lessee is the parent in a group?
In consolidated financial statements, intragroup sale and leaseback transactions are eliminated. The sale and leaseback accounting only appears in the individual financial statements of the entities involved. At the group level, the asset remains on the consolidated balance sheet.
Can the seller-lessee use the implicit rate instead of the IBR for the leaseback?
Yes, if the implicit rate can be readily determined. In most sale and leaseback transactions, the implicit rate can be calculated because both the sale price (which approximates the fair value of the asset) and the lease payments are known. This makes the implicit rate more accessible in sale and leaseback transactions than in standard leases.
How does the 2024 amendment affect existing sale and leaseback transactions?
The amendment applies retrospectively to all sale and leaseback transactions entered into after the entity's initial IFRS 16 adoption date. Entities that adopted IFRS 16 from 1 January 2019 apply the amendment to all sale and leaseback transactions entered into since that date.
What happens to the ROU asset if the leaseback is terminated early?
Early termination of the leaseback removes the ROU asset and the remaining lease liability. Any difference between the derecognised liability and derecognised ROU asset, adjusted for any termination payment, is a gain or loss in P&L. The original sale gain already recognised is not reversed.
Enroll with Global Fin X
Sale and leaseback accounting tests the intersection of IFRS 15 and IFRS 16 in a single transaction, making it one of the more technically demanding areas in the Dip IFRS syllabus. Our programme covers the full IFRS 16 series across four posts with in-depth lectures, worked examples, exam-style MCQs, and a dedicated LMS for working professionals.
Enroll Now: Dip IFRS Programme
Faculty profile: www.globalfinx.in/manikanta
This is Post 30 of the Global Fin X IFRS Series. Previous: IFRS 16: Lessor Accounting, Finance vs Operating Leases and Subleases. Next: Post 31: IFRS 16 vs IAS 17: What Changed, What Stayed and Why the Balance Sheet Exploded.