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SALE AND LEASEBACK TRANSACTIONS IFRS 16: To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of IFRS 15 for determining when a performance obligation is satisfied. [IFRS 16:99]

If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained. Accordingly, the seller only recognises the amount of gain or loss that relates to the rights transferred to the buyer. [IFRS 16:100a)]

If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. [IFRS 16:101]


IFRS 16 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for leases. IFRS 16 was issued in January 2016 and will be effective for most companies that report under IFRS in 2019.Upon becoming effective, it will replace the earlier leasing standard, IAS 17. Users are permitted to transition to the new standard either by full retrospective application (i.e., restating all leases as if they had always been accounted for under IFRS 16, with the difference between asset and liability at the transition date charged to retained earnings) or by a cumulative catch-up methodology, in which finance leases continue unchanged while IAS 17 operating leases are converted to finance leases with the initial liability and asset equal to the present value of the remaining rent (using the lessee’s incremental borrowing rate as the discount rate for the present value).

A primary principle of IFRS 16 is that all lessee leases should be reported on the balance sheet, although there are exceptions for small items (e.g., under $5000) and for leases with a term of 12 months or less. Under IFRS 16, a lessee is required to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments.


IFRS 16 requires lessors to classify leases as either an “operating lease” or a “financing lease.”The lessor recognizes revenue under a financing lease as essentially interest payments on the amount financed. The lessor recognizes income under an operating lease on a systematic consistent with the benefits derived from the leased assets, which may be a straight-line basis.

IFRS 16 was developed in collaboration with the Financial Accounting Standards Board (FASB) in the United States, but while the new FASB leasing standard will share many common features with IFRS 16, such as reporting all large leases on the balance sheet, there will be some significant differences between the two standards.

According to IASB chairman Hans Hoogervorst, “These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligation. The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”


Recognition exemptions

Instead of applying the recognition requirements of IFRS 16 described below, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term or another systematic basis for the following two types of leases:

i) leases with a lease term of 12 months or less and containing no purchase options – this election is made by class of underlying asset; and

ii) leases where the underlying asset has a low value when new (such as personal computers or small items of office furniture) – this election can be made on a lease-by-lease basis.

Identifying a lease

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use.

An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being implicitly specified at the time it is made available for use by the customer.

However, where a supplier has a substantive right of substitution throughout the period of use, a customer does not have a right to use an identified asset. A supplier’s right of substitution is only considered substantive if the supplier has both the practical ability to substitute alternative assets throughout the period of use and they would economically benefit from substitution.

A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a building). A capacity or other portion of an asset that is not physically distinct (e.g. a capacity portion of a fibre optic cable) is not an identified asset, unless it represents substantially all the capacity such that the customer obtains substantially all the economic benefits from using the asset.

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