Financial Reporting · Ind AS 116 Leases

Sale and Leaseback Transactions under Ind AS 116

Updated 5 October 2026 · Fact-checked

A sale and leaseback is when you sell an asset and lease it back from the buyer. First test the transfer as a sale under Ind AS 115. If it is a sale, record a right-of-use asset for the part of the carrying amount you retain and recognise gain only on rights transferred. If not, treat the proceeds as a financial liability.

Understand Sale and Leaseback Transactions

A sale and leaseback has two linked steps. An entity (the seller-lessee) sells an asset to another entity (the buyer-lessor). The seller-lessee then leases the same asset back. The two steps are usually agreed together, so you must look at them as one package.

The first question is always: is the transfer really a sale? Ind AS 116 sends you to Ind AS 115. You check whether the buyer-lessor has obtained control of the asset, that is, whether the performance obligation is satisfied. If the seller-lessee keeps control, there is no sale, whatever the legal documents say. A repurchase right held by the seller-lessee generally stops the buyer from obtaining control.

If it is a sale, the seller-lessee should not book the full gain. It keeps the right to use the asset, so part of the gain relates to the right it retained. Only the gain on the rights actually transferred to the buyer-lessor is recognised. The right-of-use asset is measured at the proportion of the old carrying amount that relates to the right retained.

If it is not a sale, the seller-lessee keeps the asset in its books and shows the cash received as a financial liability under Ind AS 109. The buyer-lessor does not record the asset. It records a financial asset equal to the amount paid.

Terms may be off-market. The sale price may differ from fair value, or lease payments may differ from market rates. You then adjust: a below-market term is a prepayment of lease payments, and an above-market term is additional financing from the buyer-lessor to the seller-lessee.

Key rules to remember

Right-of-use asset (sale case): ROU asset = Carrying amount of asset × (PV of lease payments ÷ Fair value of asset); Use the lease liability measured at market-based payments. The ratio shows the share of the asset the seller-lessee retains.
Total gain or loss on sale: Total gain = Fair value of asset − Carrying amount; If the price equals fair value, this is the same as price minus carrying amount.
Gain recognised by seller-lessee: Gain recognised = Total gain × (1 − PV of lease payments ÷ Fair value); Only the gain on rights transferred to the buyer-lessor is recognised. The balance is absorbed in the lower ROU asset.
Sale price above fair value: Excess of price over fair value = Additional financing (financial liability for seller-lessee); The buyer-lessor records the excess as a financial asset under Ind AS 109.
Sale price below fair value: Shortfall of price below fair value = Prepayment of lease payments; Add it to the ROU asset by treating the shortfall as a prepaid lease payment. Adjust the more readily determinable of the price difference or the lease-payment difference.
Not a sale (Ind AS 115 test fails): Seller-lessee: keep asset, financial liability = proceeds. Buyer-lessor: financial asset = amount paid; Both apply Ind AS 109 to the financial item.

How to solve Sale and Leaseback Transactions questions

Use the same order for every question. Most marks are lost by skipping the sale test or by mixing fair value and sale price.

1Read for control. Check any repurchase option, the seller's continuing rights and whether the buyer can direct the use of the asset. Conclude whether it is a sale under Ind AS 115.
2If it is not a sale, stop the sale logic. Seller-lessee: keep the asset, record cash received and a financial liability under Ind AS 109. Buyer-lessor: record a financial asset.
3If it is a sale, compare the sale price with fair value and the lease payments with market rates. Note each difference.
4Adjust for off-market terms. Price above fair value: excess is a financial liability of the seller-lessee. Price below fair value: shortfall is a prepayment of lease payments.
5Fix the lease liability as the PV of lease payments at market terms, at the rate required by Ind AS 116.
6Compute the ROU asset: carrying amount × (PV of lease payments ÷ fair value).
7Compute total gain (fair value − carrying amount) and the gain recognised (total gain × share transferred). Pass the journal entry and check that debits equal credits.
8Write the buyer-lessor entries: asset at fair value, any financial asset for excess price, then classify the leaseback as a finance or operating lease.

Quickest way: Ratio shortcut for the seller-lessee

When to use it: Use it when the question is a sale and gives carrying amount, fair value and PV of lease payments, and you only need the ROU asset and the gain.

Calculate retained share r = PV of lease payments ÷ fair value.
ROU asset = carrying amount × r.
Total gain = fair value − carrying amount. Recognised gain = total gain × (1 − r).
Lease liability = PV of lease payments. Any price above fair value goes to a separate financial liability.
Check: cash received + ROU asset = carrying amount + lease liability + financial liability + recognised gain.

Common mistakes in Sale and Leaseback Transactions

Booking the whole gain (sale price − carrying amount) in profit or loss.
Students treat it like an ordinary asset sale and forget that the seller-lessee retains a right to use the asset.
Fix: Recognise only the gain on rights transferred. Total gain × (1 − PV of lease payments ÷ fair value).
Measuring the ROU asset at the lease liability or at fair value.
Students copy the normal lessee rule, where ROU starts from the lease liability.
Fix: In a sale and leaseback, ROU = old carrying amount × retained proportion.
Skipping the Ind AS 115 sale test.
The question seems to say 'sale', so students assume it is one.
Fix: Look for a repurchase option or other signs that the seller keeps control. If control stays, it is a financing, not a sale.
Using sale price instead of fair value when working out the gain and ratio.
Students ignore the off-market adjustment.
Fix: First adjust the excess or shortfall. Then use fair value for the gain and for the ROU ratio.
Treating a price above fair value as extra gain.
Students see extra cash and assume extra profit.
Fix: The excess is additional financing from the buyer-lessor. Show it as a financial liability.
Forgetting the buyer-lessor side or its financial asset when the sale fails.
Students study only the seller-lessee.
Fix: Always write both sets of entries when the question asks for both parties.

Worked examples

Example 1

Case: Meera Ltd sells a building to Nakul Ltd for ₹1,00,00,000 cash, which equals its fair value. The building's carrying amount is ₹80,00,000. Meera leases it back for 10 years. The lease payments are at market rates and their present value is ₹30,00,000. The transfer meets the Ind AS 115 conditions for a sale. Show Meera's entry.

Show the solution

Sale test: the transfer is a sale. Price equals fair value and payments are at market rates, so no off-market adjustment is needed.
Retained share = 30,00,000 ÷ 1,00,00,000 = 30%.
ROU asset = 80,00,000 × 30% = ₹24,00,000.
Total gain = 1,00,00,000 − 80,00,000 = ₹20,00,000.
Gain relating to the right retained = 20,00,000 × 30% = ₹6,00,000. Gain recognised = 20,00,000 − 6,00,000 = ₹14,00,000.
Lease liability = ₹30,00,000.
Entry: Dr Bank 1,00,00,000; Dr ROU asset 24,00,000; Cr Building 80,00,000; Cr Lease liability 30,00,000; Cr Gain on sale 14,00,000. Debits 1,24,00,000 = credits 1,24,00,000.

Answer: ROU asset ₹24,00,000; lease liability ₹30,00,000; gain recognised ₹14,00,000.

Example 2

Case: Tara Ltd sells machinery to Uday Ltd for ₹1,00,00,000 and leases it back. The machinery's fair value is ₹90,00,000 and its carrying amount is ₹60,00,000. The transfer is a sale. The PV of lease payments at market rates is ₹30,00,000. Show Tara's entry and Uday's initial entry.

Show the solution

Sale test: it is a sale.
Price exceeds fair value by 1,00,00,000 − 90,00,000 = ₹10,00,000. Treat it as additional financing from Uday to Tara, a financial liability of ₹10,00,000.
Lease liability = PV of market-rate lease payments = ₹30,00,000.
Retained share = 30,00,000 ÷ 90,00,000 = one-third.
ROU asset = 60,00,000 × 1/3 = ₹20,00,000.
Total gain = fair value − carrying amount = 90,00,000 − 60,00,000 = ₹30,00,000. Gain relating to retained right = ₹10,00,000. Gain recognised = ₹20,00,000.
Tara's entry: Dr Bank 1,00,00,000; Dr ROU asset 20,00,000; Cr Machinery 60,00,000; Cr Financial liability 10,00,000; Cr Lease liability 30,00,000; Cr Gain on sale 20,00,000. Debits 1,20,00,000 = credits 1,20,00,000.
Uday's entry: Dr Machinery 90,00,000; Dr Financial asset (Ind AS 109) 10,00,000; Cr Bank 1,00,00,000. Uday then classifies the leaseback as a finance or operating lease.

Answer: Tara: ROU asset ₹20,00,000; lease liability ₹30,00,000; financial liability ₹10,00,000; gain ₹20,00,000. Uday: machinery ₹90,00,000 and financial asset ₹10,00,000.

Exam tips

Write 'Sale test under Ind AS 115' as your first line in every answer. Examiners award a mark for it.
Show the ratio (PV of lease payments ÷ fair value) in your working. Even if you slip on a number, you keep method marks.
In MCQs, check for a repurchase option held by the seller-lessee before computing anything.
When the question gives both sale price and fair value, circle both and decide the off-market adjustment before any other step.
Answer for both parties only when asked. If asked for the buyer-lessor, also state the lease classification.

Practice questions from Ind AS 116 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 calculate gain on sale and leaseback under Ind AS 116?

Find the total gain as fair value minus carrying amount. Then recognise only the share relating to rights transferred, which is total gain × (1 − PV of lease payments ÷ fair value). The remaining share reduces the ROU asset.

What if the fair value is different from the sale price?

Adjust the difference. If the price is above fair value, the excess is additional financing and shown as a financial liability of the seller-lessee. If it is below fair value, the shortfall is a prepayment of lease payments.

What if the transfer is not a sale?

The seller-lessee continues to recognise the asset and records the proceeds as a financial liability under Ind AS 109. The buyer-lessor does not recognise the asset and records a financial asset equal to the amount paid.

How is the ROU asset measured in a sale and leaseback?

It is the previous carrying amount of the asset multiplied by the proportion of the asset's fair value that the PV of lease payments represents. It is not simply equal to the lease liability.