Strategic Business Reporting (International) · Leases

Sale and Leaseback Accounting under IFRS 16

Updated 11 October 2026 · Fact-checked

A sale and leaseback is where an entity sells an asset and leases it back. First test whether the transfer is a sale under IFRS 15. If yes, the seller-lessee derecognises the asset, recognises a right-of-use asset for the retained part, and books only the gain relating to rights transferred. If not, it is a financing.

Understand Sale and Leaseback Transactions

In a sale and leaseback, the seller-lessee sells an asset to a 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 key question is whether the transfer is a sale. IFRS 16 sends you to IFRS 15: has control passed to the buyer? Look at the five control indicators: present right to payment, legal title, physical possession, risks and rewards, and acceptance. A repurchase option, meaning any right to repurchase other than at fair value on a substitutable asset, normally means control has not passed. So no sale occurs. A right to repurchase at fair value of the asset on the date of repurchase, where the asset is substitutable and widely available, does not by itself block a sale.

If it is a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained. It recognises only the gain or loss on the rights transferred to the buyer-lessor. The buyer-lessor accounts for the purchase of the asset, then applies normal lessor accounting (operating or finance lease).

If it is not a sale, the seller-lessee keeps the asset on its books and recognises a financial liability equal to the proceeds, under IFRS 9. The buyer-lessor does not recognise the asset. It recognises a financial asset (a receivable) equal to the proceeds.

The terms may be off-market. IFRS 16 requires you to measure the adjustment using whichever of these two differences is more readily determinable:

the difference between the fair value of the asset and the sale price, or
the difference between the PV of the contractual lease payments and the PV of market-rate lease payments.

If the terms are below market (sale price below fair value, or lease payments below market rentals), treat the difference as a prepayment of lease payments. If the terms are above market (sale price above fair value, or lease payments above market rentals), treat the difference as additional financing from the buyer-lessor to the seller-lessee. Use one basis for the adjustment. Do not adjust for both.

Key rules to remember

Right-of-use asset retained: ROU = Carrying amount × (PV of lease payments ÷ Fair value of asset); Use the PV of the lease payments, which equals the lease liability at commencement. Any prepayment adjustment or initial direct costs are added to the ROU asset separately. They are not part of this proportion.
Total gain before restriction: Total gain = Fair value − Carrying amount; This applies when the sale is at fair value. Adjust for off-market terms first.
Gain recognised: Gain recognised = Total gain × (Fair value − PV of lease payments) ÷ Fair value; Only the gain on rights transferred is recognised. The rest is absorbed in the ROU asset.
Below fair value adjustment: Prepayment of lease payments = Fair value − Sale price; Adjust the proceeds up to fair value: cash received + prepayment = fair value. Include the prepayment in the ROU asset, on top of the proportion above. The lease liability is the PV of the actual lease payments. See the third worked example.
Above fair value adjustment: Additional financing = Sale price − Fair value; Account for it as a financial liability by the seller-lessee. Cash received = fair value proceeds + loan.
Failed sale: Financial liability = Proceeds received; Seller-lessee keeps the asset and continues to depreciate it. The buyer-lessor books a financial asset.

How to solve Sale and Leaseback Transactions questions

Use this order for any sale and leaseback question. It stops you mixing up the sale test, the off-market adjustments and the gain calculation.

1Decide if the transfer is a sale under IFRS 15. Check control indicators, and any repurchase option. If it is not a sale, go straight to the financing treatment.
2Compare sale price with fair value. Adjust for below-market (prepayment) or above-market (additional financing) terms.
3Calculate the lease liability: the PV of lease payments at the rate implicit in the lease, or the incremental borrowing rate if not determinable.
4Calculate the ROU asset as carrying amount × PV of lease payments ÷ fair value. Add any prepayment adjustment.
5Calculate the total gain (fair value − carrying amount), then the portion relating to rights transferred. That is the gain recognised.
6Write the journal: remove the asset, record cash, record the ROU asset, the lease liability, any financing liability, and the gain.
7Add year-end entries if asked: depreciation of the ROU asset, interest on the lease liability, and the payment.
8Finish with a brief comment on the buyer-lessor's treatment or the disclosure if the requirement asks for it.

Quickest way: Proportion shortcut for a market-rate sale

When to use it: Use when the sale is at fair value and the lease payments are at market rates, so no off-market adjustment is needed.

Work out the PV of lease payments (lease liability).
Compute the ratio: lease liability ÷ fair value. This is the share of the asset you keep.
ROU asset = carrying amount × that ratio.
Gain recognised = total gain × (1 − that ratio).
Balance check: cash received + ROU asset = carrying amount derecognised + lease liability + gain. If it does not balance, recheck the ratio.

Common mistakes in Sale and Leaseback Transactions

Recognising the whole gain (fair value − carrying amount) in profit or loss.
Students remember the old IAS 17 approach, or treat the leaseback as a separate event.
Fix: Under IFRS 16, recognise only the gain relating to rights transferred. The rest is built into a lower ROU asset.
Measuring the ROU asset at the lease liability or at fair value.
Normal lessee accounting sets the ROU asset equal to the liability, so students copy it.
Fix: In a sale and leaseback, ROU = carrying amount × PV of payments ÷ fair value.
Treating a sale with a repurchase option as a sale.
Students focus on legal title passing and ignore the control test.
Fix: A repurchase right that is not at fair value on a substitutable asset prevents control passing. So there is no sale, and you account for the transaction as a financing: keep the asset and record a financial liability for the proceeds.
Ignoring off-market terms or adjusting the wrong way.
Students rush and take the sale price as fair value.
Fix: Below fair value means a prepayment of rent. Above fair value means additional financing. Always compare price with fair value first.
Derecognising the asset in a failed sale.
Cash has been received, so it feels like a disposal.
Fix: In a failed sale, keep the asset, keep depreciating it, and record a financial liability for the proceeds.
Showing no gain or loss calculation and just giving the number.
Students rely on memory of the formula.
Fix: Show each step clearly. Marks go to the method, even if one figure is wrong.

Worked examples

Example 1

On 1 January 20X1, Delta sold a building to Omega for $2,000,000, its fair value. The carrying amount was $1,200,000. Delta leases it back for 10 years at $200,000 a year payable in arrears. Assume the PV of the lease payments is $1,200,000 and lease payments are at market rate. The transfer meets the IFRS 15 criteria for a sale. Calculate the ROU asset and the gain Delta recognises.

Show the solution

The sale is at fair value and payments are at market, so no off-market adjustment is needed.
Total gain = 2,000,000 − 1,200,000 = 800,000.
ROU asset = 1,200,000 × (1,200,000 ÷ 2,000,000) = 1,200,000 × 0.6 = 720,000.
Gain on rights transferred = 800,000 × (2,000,000 − 1,200,000) ÷ 2,000,000 = 800,000 × 0.4 = 320,000.
Check the journal: Dr Cash 2,000,000, Dr ROU asset 720,000 = 2,720,000. Cr Building 1,200,000, Cr Lease liability 1,200,000, Cr Gain 320,000 = 2,720,000. It balances.

Answer: ROU asset $720,000; gain recognised in profit or loss $320,000; lease liability $1,200,000.

Example 2

On 1 January 20X1, Sigma sold equipment with a carrying amount of $500,000 to Tau for $900,000 and leased it back. The fair value of the equipment is $800,000. The sale meets the IFRS 15 criteria. Lease payments are at market rates, and the PV of the lease payments relating to the lease is $400,000. Any repayments of the $100,000 above-market excess are separate from these lease payments and are accounted for under IFRS 9. Calculate the amounts Sigma records at the date of sale.

Show the solution

The sale price of $900,000 exceeds fair value of $800,000 by $100,000. This is additional financing from Tau to Sigma.
Recognise a financial liability of $100,000. Sigma accounts for it under IFRS 9, with its own repayments. Those repayments are not lease payments.
Treat the sale as being at fair value of $800,000. The lease liability is the PV of the payments relating to the lease only, which is $400,000.
Total gain = 800,000 − 500,000 = 300,000.
ROU asset = 500,000 × (400,000 ÷ 800,000) = 250,000.
Gain recognised = 300,000 × (800,000 − 400,000) ÷ 800,000 = 300,000 × 0.5 = 150,000.
Check the journal: Dr Cash 900,000, Dr ROU 250,000 = 1,150,000. Cr Equipment 500,000, Cr Lease liability 400,000, Cr Financial liability 100,000, Cr Gain 150,000 = 1,150,000. It balances.

Answer: ROU asset $250,000; lease liability $400,000; financial liability $100,000; gain recognised $150,000.

Example 3

On 1 January 20X1, Kappa sold equipment with a carrying amount of $500,000 to Zeta for $700,000 and leased it back. The fair value of the equipment is $800,000. The sale meets the IFRS 15 criteria. The lease payments are below market rates, but the market rentals cannot be measured reliably. The fair value is readily determinable. The PV of the actual lease payments is $400,000. Calculate the amounts Kappa records at the date of sale.

Show the solution

The terms are below market. The difference between fair value and sale price ($100,000) is more readily determinable than the PV of market rentals, which cannot be measured reliably. So use the price comparison as the basis for the adjustment. Do not also adjust for the lease payments.
The sale price of $700,000 is below fair value of $800,000 by $100,000. Treat this as a prepayment of lease payments.
Adjust the proceeds up to fair value: cash 700,000 + prepayment 100,000 = 800,000.
The lease liability is the PV of the actual lease payments, which is $400,000.
Total gain = 800,000 − 500,000 = 300,000.
ROU asset = 500,000 × (400,000 ÷ 800,000) = 250,000. Add the prepayment of 100,000 to give 350,000.
Gain recognised = 300,000 × (800,000 − 400,000) ÷ 800,000 = 300,000 × 0.5 = 150,000.
Check the journal: Dr Cash 700,000, Dr ROU 350,000 = 1,050,000. Cr Equipment 500,000, Cr Lease liability 400,000, Cr Gain 150,000 = 1,050,000. It balances.

Answer: ROU asset $350,000 (including the $100,000 prepayment); lease liability $400,000; gain recognised $150,000.

Exam tips

Always start with the IFRS 15 control test. Marks are often given for saying why a sale does or does not occur, especially with repurchase options.
Write the full journal. It proves your numbers balance and shows the examiner your method.
In an off-market scenario, state which of the two comparisons you use (sale price versus fair value, or PV of contractual payments versus PV of market payments). Say it is the one that is more readily determinable, and give the reason.
Link to the professional skills marks: comment on the commercial reason for the deal and whether management may want to show a larger gain or lower debt.
If the question asks about the buyer-lessor, say whether the lease is operating or finance, and for a failed sale say it records a financial asset.

Practice questions from Leases

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 sale under IFRS 16?

IFRS 16 applies the IFRS 15 test for when a performance obligation is satisfied. Ask whether the buyer-lessor has obtained control of the asset. A repurchase option normally shows that control has not passed, unless it is at fair value on a substitutable, widely available asset.

What happens if the sale and leaseback is not a sale?

The seller-lessee keeps the asset on its statement of financial position. It records a financial liability equal to the cash received. The buyer-lessor records a financial asset instead of the underlying asset.

How do I calculate the gain on a sale and leaseback?

Work out the total gain as fair value less carrying amount. Recognise only the proportion relating to rights transferred, which is the fair value less the PV of lease payments, divided by fair value. The rest reduces the ROU asset.

What if the sale price is above or below 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 for these before calculating the gain.