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Financial Reporting · Leasing

Sale and Leaseback Accounting under IFRS 16

Updated 11 October 2026 · Fact-checked

In a sale and leaseback, an entity sells an asset and leases it back. First test whether the transfer is a sale under IFRS 15. If it is, derecognise the asset, recognise a right-of-use asset at the proportion of carrying amount retained, and recognise only the gain relating to rights transferred. If not, keep the asset and record a financial liability.

Understand Sale and Leaseback Transactions

A sale and leaseback happens when a seller (the seller-lessee) sells an asset to a buyer (the buyer-lessor) and then leases the same asset back. Businesses do it to release cash tied up in property or equipment while still using the asset.

The first question is whether the transfer is a sale. IFRS 16 tells you to apply the IFRS 15 rules on satisfying a performance obligation. The key idea is control: has the buyer obtained control of the asset? A repurchase option at a fixed price, or at a price that is not the asset's fair value at the time, usually means control has not passed. Then it is not a sale.

If it is not a sale, the seller-lessee keeps the asset in its books and records the cash received as a financial liability, accounted for under IFRS 9. The buyer-lessor records a financial asset (a receivable) for the same amount. No gain is recognised.

If it is a sale, the seller-lessee stops recognising the asset. It then recognises a right-of-use asset for only the part of the old carrying amount that relates to the right of use it keeps. It also recognises a lease liability. Only the gain relating to the rights actually transferred to the buyer goes to profit or loss. The part of the gain that relates to the rights kept is not recognised.

Terms can be off-market. Compare the sale price with fair value, and compare lease payments with market rentals. If the sale price is below fair value, treat the shortfall as a prepayment of lease payments. If the sale price is above fair value, treat the excess as additional financing from the buyer-lessor. Use whichever measure is more readily determinable for the adjustment: the fair value difference or the present value difference of payments.

Key rules to remember

Is it a sale?
Sale only if the buyer obtains control (IFRS 15 test)
If not a sale: keep the asset and recognise a financial liability equal to the proceeds.
Right-of-use asset retained
ROU asset = Carrying amount × (PV of lease payments ÷ Fair value of asset)
Use this when the sale is at fair value and it is a genuine sale.
Total gain on sale
Total gain = Fair value − Carrying amount
Only part of this is recognised.
Gain recognised
Gain recognised = Total gain × (Fair value − PV of lease payments) ÷ Fair value
This is the gain relating to rights transferred to the buyer.
Below-market sale price
Adjustment = Fair value − Sale price → treat as prepaid lease payments
Add to the ROU asset. Also adjust where lease rentals are below market.
Above-market sale price
Adjustment = Sale price − Fair value → treat as additional financing
Add to the lease liability. Gain is then based on fair value, not the inflated price.
Opening lease liability
Lease liability = PV of lease payments (plus any additional financing)
Cash received is debited to bank at the actual proceeds.

How to solve Sale and Leaseback Transactions questions

Use this order for any sale and leaseback question. Write the working in columns so the marker can follow it.

  1. 1Decide whether the transfer is a sale. Look for repurchase options at a fixed price or a price other than fair value at the time, and other signs that the buyer lacks control.
  2. 2If it is not a sale, keep the asset, continue depreciating it, and credit a financial liability for the proceeds. Charge interest on that liability. Stop here.
  3. 3If it is a sale, compare the sale price with fair value. Adjust for any below-market (prepayment) or above-market (additional financing) element.
  4. 4Calculate the lease liability as the present value of the lease payments, using the rate given. Add any additional financing.
  5. 5Calculate the right-of-use asset: carrying amount × PV of payments ÷ fair value. Add any prepayment.
  6. 6Calculate the total gain (fair value − carrying amount), then the portion relating to rights transferred. Recognise only that portion in profit or loss.
  7. 7Post the journal: Dr Bank, Dr ROU asset, Cr Asset, Cr Lease liability, Cr Gain. Check that debits equal credits.
  8. 8Finish with subsequent measurement if asked: depreciate the ROU asset and unwind interest on the liability.

Quickest way: Four-line sale and leaseback shortcut

When to use it: Use for a genuine sale at fair value when the exam gives the carrying amount, fair value and PV of lease payments.

  1. Write FV, carrying amount (CA) and PV of payments in a box.
  2. ROU asset = CA × PV ÷ FV.
  3. Gain recognised = (FV − CA) × (FV − PV) ÷ FV.
  4. Lease liability = PV. Bank = FV. Balance the journal with the asset derecognised: Dr Bank + Dr ROU = Cr Asset + Cr Liability + Cr Gain.

Common mistakes in Sale and Leaseback Transactions

  • Treating every sale and leaseback as a sale.

    The legal form says 'sale', so students stop thinking.

    Fix: Always test for control first. A repurchase option at a fixed price is a red flag. If it is not a sale, record a financial liability and recognise no gain.

  • Recognising the whole gain in profit or loss.

    Under old rules, gains could be recognised in full in some cases, so students carry that habit.

    Fix: Under IFRS 16 recognise only the gain relating to the rights transferred: total gain × (FV − PV) ÷ FV.

  • Measuring the ROU asset at the old carrying amount or at fair value.

    Students forget the asset is only partly retained.

    Fix: Use carrying amount × PV of payments ÷ FV. Add any prepayment if the sale price was below fair value.

  • Ignoring off-market terms.

    The sale price is used as if it were fair value.

    Fix: Compare price with fair value. Shortfall is a prepayment of lease payments. Excess is additional financing and increases the lease liability.

  • Forgetting to derecognise the asset.

    Students focus on the lease side and leave the original asset in the books.

    Fix: Credit the asset at its carrying amount in the journal, after depreciating it to the date of sale.

  • Using the wrong present value basis for the liability.

    Rentals are added up without discounting.

    Fix: Discount the lease payments at the rate given, usually the rate implicit in the lease or the incremental borrowing rate.

Worked examples

Example 1

On 1 January 20X1 Delta sells a building to Buyco for $900,000 cash, which is its fair value. Carrying amount is $600,000. Delta leases it back for 10 years. The PV of the lease payments is $270,000. The transfer qualifies as a sale. Calculate the ROU asset, lease liability and gain recognised, and give the journal.

Show the solution
  1. Total gain = 900,000 − 600,000 = $300,000.
  2. ROU asset = 600,000 × 270,000 ÷ 900,000 = $180,000.
  3. Gain relating to rights retained = 300,000 × 270,000 ÷ 900,000 = $90,000.
  4. Gain recognised = 300,000 − 90,000 = $210,000. Check: 300,000 × (900,000 − 270,000) ÷ 900,000 = $210,000.
  5. Lease liability = $270,000.
  6. Journal: Dr Bank 900,000; Dr ROU asset 180,000; Cr Building 600,000; Cr Lease liability 270,000; Cr Profit or loss (gain) 210,000. Debits 1,080,000 = credits 1,080,000.

Answer: ROU asset $180,000; lease liability $270,000; gain recognised $210,000.

Example 2

On 1 April 20X1 Echo sells equipment with a carrying amount of $400,000 and fair value of $500,000 for $560,000 cash. It leases the equipment back. The PV of the lease payments is $100,000, and the payments are at market rates. The transfer is a sale. Show the accounting.

Show the solution
  1. Sale price exceeds fair value by 560,000 − 500,000 = $60,000. Treat this as additional financing, so it is a liability.
  2. Lease liability = PV of payments 100,000 + additional financing 60,000 = $160,000.
  3. Total gain is based on fair value: 500,000 − 400,000 = $100,000.
  4. ROU asset = 400,000 × 100,000 ÷ 500,000 = $80,000.
  5. Gain recognised = 100,000 × (500,000 − 100,000) ÷ 500,000 = $80,000.
  6. Journal: Dr Bank 560,000; Dr ROU asset 80,000; Cr Equipment 400,000; Cr Financial liability (lease liability) 160,000; Cr Profit or loss 80,000. Debits 640,000 = credits 640,000.

Answer: Gain recognised $80,000; ROU asset $80,000; total liabilities recognised $160,000, of which $60,000 is additional financing.

Exam tips

  • Read the first sentence for the control test. Words like 'repurchase at a fixed price' usually signal that it is not a sale, which makes the question short.
  • In Section C, show each formula before the number. Marks go to the method even if arithmetic slips.
  • If an objective test asks for the gain, check whether it wants the total gain or the gain recognised. They differ.
  • Always check whether the price equals fair value. Adjustments for above or below fair value are common extra steps.
  • Finish with a journal that balances. It is the fastest way to catch an error in your ROU asset or gain.

Practice questions from Leasing

Sale and Leaseback Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Sale and Leaseback Transactions: frequently asked questions

How do I know if a sale and leaseback is a real sale?

Apply the IFRS 15 test for whether the buyer has obtained control of the asset. A repurchase right at a fixed price, or at a price other than fair value at the time, normally means control has not passed. If control has not passed, it is not a sale.

What happens if the transfer is not a sale?

The seller-lessee keeps the asset on its statement of financial position and recognises a financial liability equal to the cash received. No gain or loss is recognised. The buyer-lessor records a financial asset instead of the underlying asset.

Why is only part of the gain recognised?

The seller-lessee keeps the right to use the asset, so it has not given up everything. IFRS 16 recognises only the gain relating to the rights transferred to the buyer-lessor.

What if the sale price is not equal to fair value?

Below fair value, the shortfall is a prepayment of lease payments. Above fair value, the excess is additional financing from the buyer-lessor. Adjust before calculating the gain, which is based on fair value.