Advanced Accounting · AS 19 Leases

Sale and Leaseback Transactions under AS 19

Q: How is profit on sale and leaseback treated under AS 19 if it is a finance lease?

The profit is not recognised immediately. The seller-lessee defers the excess of sale proceeds over carrying amount and amortises it over the lease term in proportion to the depreciation of the leased asset. The same deferral applies to a deficiency, that is, a loss on the sale.

Q: What if the leaseback is an operating lease and the sale price equals fair value?

Then the sale is at fair value and the profit or loss is recognised immediately. No deferral is needed. Just check whether fair value is below carrying amount. Only in that case is the asset written down to fair value with an immediate loss of carrying amount − fair value, which equals sale price − carrying amount here.

Q: What happens if the sale price is above fair value in an operating leaseback?

Profit up to fair value is recognised immediately. The excess of sale price over fair value is deferred and amortised over the period for which the asset is expected to be used. This deferral still applies even if fair value is below carrying amount. Only in that case, where fair value at the time of sale is less than carrying amount, the carrying amount is written down to fair value and the loss of (carrying amount − fair value) is recognised immediately. The excess of sale price over fair value is still deferred.

Q: When is a loss deferred in an operating leaseback?

When the sale price is below fair value and the loss is compensated by future lease payments at below market price. In that case the loss is deferred and amortised in proportion to the lease payments over the expected period of use. Otherwise it is recognised immediately.

Updated 4 October 2026 · Fact-checked

A sale and leaseback is when you sell an asset and lease it back. Under AS 19, if the leaseback is a finance lease, defer any profit or loss and amortise it over the lease term. If it is an operating lease, compare sale price with fair value: recognise profit up to fair value immediately and defer any excess.

Understand Sale and Leaseback Transactions

In a sale and leaseback, an owner sells an asset and at once leases the same asset back from the buyer. The seller becomes the seller-lessee. The buyer becomes the lessor. The rent and the sale price are usually linked, so AS 19 does not treat the sale as a normal, stand-alone sale.

The accounting depends on the type of leaseback. First classify the lease as finance or operating using the normal AS 19 tests (does it transfer substantially all risks and rewards of ownership). Then apply the rule for that type.

If the leaseback is a finance lease: the seller-lessee has not really parted with the risks and rewards. So any excess or deficiency of sale proceeds over carrying amount is not recognised as income or loss immediately. You defer it and amortise it over the lease term, in proportion to the depreciation of the leased asset. This applies to a profit (sale proceeds above carrying amount) and to a loss (sale proceeds below carrying amount) alike.

If the leaseback is an operating lease: the sale is a genuine sale. Now fair value matters. If sale price equals fair value, recognise the profit or loss immediately. If fair value is below carrying amount, the write-down rule in the last paragraph applies. In that case the loss equals carrying amount − fair value, which is the same as carrying amount − sale price when the sale price equals fair value, so the figure does not change. If sale price is below fair value and fair value is not below carrying amount, recognise the profit or loss (sale price − carrying amount) immediately, except where the loss is made up by future rentals set below market price. That loss is deferred and amortised in proportion to the lease payments over the expected period of use. If sale price is above fair value and fair value is not below carrying amount, recognise the profit up to fair value now and defer the excess over fair value, amortising it over the period the asset is expected to be used.

One more rule for operating leases applies only if fair value at the time of sale is less than the carrying amount. In that case, write the carrying amount down to fair value by recognising a loss equal to the difference (carrying amount − fair value) immediately. If fair value is not below carrying amount, there is no such write-down. After the write-down, apply the usual fair value rules to the written-down amount. The write-down loss and the sale price comparison are two separate components of the total (sale price − carrying amount), so do not count either one twice.

If the sale price is also above fair value, the excess of sale price over fair value (sale price − fair value) is deferred and amortised over the period the asset is expected to be used. The immediate loss of (carrying amount − fair value) and the deferred profit of (sale price − fair value) net to the total (sale price − carrying amount).
If the sale price is below fair value, the immediate loss is still (carrying amount − fair value). The further shortfall of (fair value − sale price) is also recognised immediately, unless it is compensated by future rentals set below market price. In that case it is deferred and amortised in proportion to the lease payments over the expected period of use. In total the loss is carrying amount − sale price.

Key rules to remember

Finance leaseback: profit or loss: Deferred amount = Sale price − Carrying amount (an excess if positive, a deficiency if negative); amortise over lease term in proportion to depreciation of the leased asset; Nothing goes to profit and loss at the time of sale. The deferral covers both an excess and a deficiency of sale proceeds over carrying amount.
Operating leaseback: sale price = fair value: Profit or loss = Sale price − Carrying amount, recognised immediately; Applies when it is clear the deal is at fair value. If fair value is below carrying amount, the write-down rule (last row) applies. The loss is then carrying amount − fair value, which equals carrying amount − sale price here, so the figure is unchanged.
Operating leaseback: sale price > fair value: Immediate profit = Fair value − Carrying amount; Deferred = Sale price − Fair value; Use this when fair value is not below carrying amount. Amortise the deferred excess over the period the asset is expected to be used. If fair value is below carrying amount, use the last row instead.
Operating leaseback: sale price < fair value: If fair value ≥ Carrying amount: Profit or loss = Sale price − Carrying amount, recognised immediately. If fair value < Carrying amount: Loss = (Carrying amount − Fair value) + (Fair value − Sale price) = Carrying amount − Sale price; Exception: a loss compensated by below-market future rentals is deferred and amortised in proportion to lease payments over the expected period of use. When fair value is below carrying amount, the write-down loss (carrying amount − fair value) is always immediate. Only the further shortfall (fair value − sale price) can be deferred under this exception.
Operating leaseback: fair value < carrying amount: Only if fair value at the time of sale < Carrying amount: Step 1: Immediate loss = Carrying amount − Fair value (carrying amount is written down to fair value). Step 2: if Sale price > Fair value, Deferred profit = Sale price − Fair value. If Sale price < Fair value, further shortfall = Fair value − Sale price (immediate unless compensated by below-market rentals). Check: Sale price − Carrying amount = (Sale price − Fair value) − (Carrying amount − Fair value) in every case; This rule applies only when fair value at the time of sale is less than the carrying amount. The write-down loss and the sale price comparison are separate components that add up to the total (sale price − carrying amount). Example: carrying amount ₹50,00,000 and fair value ₹40,00,000. If sale price is ₹45,00,000, the immediate loss is ₹10,00,000 and the deferred profit is ₹5,00,000, which nets to a ₹5,00,000 loss (45,00,000 − 50,00,000). If sale price is ₹35,00,000, the loss is ₹10,00,000 plus ₹5,00,000, which is ₹15,00,000 (50,00,000 − 35,00,000). If fair value is not below carrying amount, there is no write-down.

How to solve Sale and Leaseback Transactions questions

Use the same order for every sale and leaseback question. The classification of the leaseback comes first, because it decides which rule applies.

1Write down the sale price, carrying amount (book value) and fair value, if given.
2Classify the leaseback as a finance lease or an operating lease. Look for a clear statement, or for transfer of risks and rewards, lease term versus asset life and present value of rentals versus fair value.
3Compute the total gain or loss: Sale price − Carrying amount.
4If it is a finance lease, defer the whole excess or deficiency (profit or loss). Amortise it over the lease term in proportion to depreciation. With straight-line depreciation this means equal yearly amounts.
5If it is an operating lease, check whether fair value at the time of sale is below carrying amount. Only if it is, write the carrying amount down to fair value and recognise the loss of (carrying amount − fair value) immediately. If it is not, there is no write-down. Then compare sale price with fair value (using the written-down amount where a write-down was made) and apply the matching rule: equal, below, or above. Any excess of sale price over fair value is deferred.
6Split the total into the part recognised immediately and the part deferred. Check that the two parts add up to the total.
7Compute the yearly amortisation of the deferred part over the correct period: lease term for a finance lease, expected period of use for an operating lease.
8State the amounts taken to the statement of profit and loss this year and the balance of deferred amount carried forward.

Quickest way: Two-question shortcut: type, then fair value

When to use it: Use for MCQs and for the first lines of any written answer when time is short.

Ask: finance lease? If yes, defer and amortise the excess or deficiency of sale price over carrying amount (profit or loss) over the lease term. No fair value comparison is needed.
If operating, first check whether fair value is below carrying amount. If so, write the asset down to fair value and take that difference as an immediate loss. Then ask: is the sale price above, equal to, or below fair value?
Equal: all gain or loss now. Above: gain up to fair value now, excess over fair value deferred. Below: all now, unless the loss is offset by cheap future rent. If fair value is below carrying amount and sale price is below fair value, the write-down loss (carrying amount − fair value) is immediate and the further shortfall (fair value − sale price) is immediate unless offset by cheap future rent. In total the loss is carrying amount − sale price.
For MCQs, compute the gain (sale price − carrying amount) and the deferred portion, then divide by years. Eliminate options that book the full profit in year one for a finance lease.
In written answers, state the rule in one line, show the split in a small working, then give the yearly amortisation. Each of these lines earns step marks.

Common mistakes in Sale and Leaseback Transactions

Recognising the full profit or loss immediately in a finance leaseback.
Students treat it like a normal sale of an asset.
Fix: For a finance leaseback, always defer the excess or deficiency of sale proceeds over carrying amount and amortise it over the lease term, in proportion to depreciation of the leased asset.
Ignoring fair value in an operating leaseback and using sale price minus carrying amount for all profit.
Fair value is given as extra data and seems unimportant.
Fix: In an operating leaseback, split the gain at fair value. The part up to fair value is immediate. Any excess of sale price over fair value is deferred.
Amortising the deferred excess over the lease term in an operating leaseback.
Students carry over the finance lease rule.
Fix: For an operating leaseback with sale price above fair value, amortise over the period the asset is expected to be used, not automatically the lease term.
Missing the immediate loss when fair value is below carrying amount, or forgetting to defer the excess of sale price over fair value in that case.
Students only compare sale price with carrying amount, or think the loss rule replaces the deferral rule.
Fix: In an operating leaseback, first check fair value against carrying amount. If fair value is less, write the asset down to fair value and recognise the difference (carrying amount − fair value) as a loss immediately. Then compare the sale price with fair value. If the sale price is above fair value, still defer the excess and amortise it.
Deferring a loss in every below-fair-value case.
Students assume prudence means loss deferral.
Fix: In an operating leaseback, defer the loss only if it is compensated by future lease payments at below market price. Otherwise recognise it immediately.

Worked examples

Example 1

Alpha Ltd sold machinery with a carrying amount of ₹40,00,000 for ₹50,00,000 on 1 April and leased it back for 5 years. The leaseback is a finance lease. The machinery is depreciated on a straight-line basis over the 5-year lease term. Show the treatment of the profit in the books of Alpha Ltd.

Show the solution

Profit on sale = ₹50,00,000 − ₹40,00,000 = ₹10,00,000.
The leaseback is a finance lease, so the profit is not recognised immediately.
Defer the profit of ₹10,00,000 and amortise it over the lease term of 5 years in proportion to depreciation.
Depreciation is straight-line, so the amortisation is equal each year: ₹10,00,000 ÷ 5 = ₹2,00,000.
At the end of year 1, deferred profit carried forward = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.

Answer: The profit of ₹10,00,000 is deferred and recognised at ₹2,00,000 per year over 5 years. Nothing is recognised on the date of sale.

Example 2

Beta Ltd sold equipment with a carrying amount of ₹30,00,000 for ₹40,00,000. Fair value at the date of sale was ₹36,00,000. It leased the equipment back under an operating lease. The equipment is expected to be used for 4 years. Show the treatment of the profit.

Show the solution

Total gain = ₹40,00,000 − ₹30,00,000 = ₹10,00,000.
The leaseback is an operating lease and the sale price (₹40,00,000) is above fair value (₹36,00,000).
Fair value (₹36,00,000) is above carrying amount (₹30,00,000), so the fair value below carrying amount loss rule does not apply and no immediate loss arises.
Immediate profit = Fair value − Carrying amount = ₹36,00,000 − ₹30,00,000 = ₹6,00,000.
Deferred amount = Sale price − Fair value = ₹40,00,000 − ₹36,00,000 = ₹4,00,000.
Check: ₹6,00,000 + ₹4,00,000 = ₹10,00,000, which equals the total gain.
Amortise the deferred ₹4,00,000 over the expected period of use: ₹4,00,000 ÷ 4 = ₹1,00,000 per year.

Answer: Recognise ₹6,00,000 profit immediately. Defer ₹4,00,000 and recognise ₹1,00,000 each year over 4 years.

Exam tips

Always classify the leaseback first. Write the words 'finance lease' or 'operating lease' at the start of your answer, because it earns the first mark.
In operating lease questions, underline the fair value and set out a three-line split: total gain, immediate part, deferred part. Show the check that they add up.
Check the amortisation period. Finance lease: lease term. Operating lease with sale price above fair value: expected period of use.
For MCQs, the options often include the full gain recognised immediately and the full gain deferred. Know which type of lease makes each one right.

Practice questions from AS 19 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 is profit on sale and leaseback treated under AS 19 if it is a finance lease?

The profit is not recognised immediately. The seller-lessee defers the excess of sale proceeds over carrying amount and amortises it over the lease term in proportion to the depreciation of the leased asset. The same deferral applies to a deficiency, that is, a loss on the sale.

What if the leaseback is an operating lease and the sale price equals fair value?

Then the sale is at fair value and the profit or loss is recognised immediately. No deferral is needed. Just check whether fair value is below carrying amount. Only in that case is the asset written down to fair value with an immediate loss of carrying amount − fair value, which equals sale price − carrying amount here.

What happens if the sale price is above fair value in an operating leaseback?

Profit up to fair value is recognised immediately. The excess of sale price over fair value is deferred and amortised over the period for which the asset is expected to be used. This deferral still applies even if fair value is below carrying amount. Only in that case, where fair value at the time of sale is less than carrying amount, the carrying amount is written down to fair value and the loss of (carrying amount − fair value) is recognised immediately. The excess of sale price over fair value is still deferred.

When is a loss deferred in an operating leaseback?

When the sale price is below fair value and the loss is compensated by future lease payments at below market price. In that case the loss is deferred and amortised in proportion to the lease payments over the expected period of use. Otherwise it is recognised immediately.