Corporate Financial Reporting · Leases (Ind AS 116)

Sale and Leaseback Accounting under Ind AS 116

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 Ind AS 115. If yes, adjust to fair value, measure the right-of-use asset at the retained proportion of carrying amount, and recognise gain only on rights transferred. If no, treat it as financing.

Understand Sale and Leaseback Transactions

A sale and leaseback happens when the seller-lessee transfers an asset to a buyer-lessor and leases the same asset back. Companies do it to release cash tied up in a building or plant while still using it.

The first question is always: is the transfer a sale under Ind AS 115? Both parties apply paragraphs 99-103 of Ind AS 116. If the transfer is not a sale, the seller-lessee keeps the asset on its books and records a financial liability equal to the proceeds (Ind AS 109). The buyer-lessor does not record the asset and records a financial asset equal to the proceeds.

If it is a sale, the seller-lessee does not book the full gain. It keeps a right of use, so it measures the right-of-use asset at the proportion of the old carrying amount that relates to the right retained. It recognises only the gain that relates to the rights transferred to the buyer-lessor. The buyer-lessor accounts for the purchase under the applicable Standards and the lease under the lessor requirements.

Sale price and lease payments may not be at market. Then you adjust so that sale proceeds are at fair value. Below-market terms are treated as a prepayment of lease payments. Above-market terms are treated as additional financing from the buyer-lessor to the seller-lessee. You measure the adjustment on whichever is more readily determinable: the difference between the fair value of the consideration and the fair value of the asset, or the difference between the present value of contractual lease payments and the present value of market-rate payments.

Key rules to remember

Not a sale: Seller-lessee: keep asset + financial liability = proceeds. Buyer-lessor: financial asset = proceeds; Both parties then apply Ind AS 109.
Above-market price adjustment: Additional financing = Sale price − Fair value; Treated as a loan from buyer-lessor to seller-lessee.
Below-market price adjustment: Prepayment of lease payments = Fair value − Sale price; Below-market terms are accounted for as a prepayment of lease payments (para 101(a)).
Right-of-use asset: ROU = Carrying amount × PV of lease payments for the lease ÷ Fair value; Use PV of lease payments after removing any financing element.
Total gain: Gain = Fair value − Carrying amount; Only part is recognised.
Gain recognised: Gain recognised = Gain × (Fair value − PV of lease payments) ÷ Fair value; This is the gain on rights transferred to the buyer-lessor.
Lease liability: Lease liability = PV of lease payments (excluding financing portion); Discount at the rate implicit in the lease, or else the incremental borrowing rate.

How to solve Sale and Leaseback Transactions questions

Follow this order for any sale and leaseback question.

1Decide whether the transfer satisfies Ind AS 115 as a sale. If not, record a financial liability (seller) and financial asset (buyer) equal to proceeds and stop.
2Compare sale price with fair value. Compute the difference.
3If price is above fair value, treat the excess as additional financing. If below, treat the shortfall as prepayment of lease payments.
4Split the PV of lease payments into the financing part and the lease part. Lease liability is the lease part.
5Compute ROU asset = carrying amount × PV of lease part ÷ fair value.
6Compute total gain on the basis of fair value, then the portion relating to rights retained and the portion transferred. Recognise only the transferred portion.
7Pass the seller-lessee journal entry, then the buyer-lessor entry, and check that debits equal credits.

Quickest way: Proportion method in four lines

When to use it: Use when the question gives fair value, carrying amount and PV of lease payments and asks for entries or gain.

Write ratio R = PV of lease liability ÷ fair value.
ROU asset = carrying amount × R.
Gain recognised = (fair value − carrying amount) × (1 − R).
Cash received = sale price; any excess over fair value is a financial liability. Balance the entry.

Common mistakes in Sale and Leaseback Transactions

Recognising the full gain (fair value − carrying amount) in profit or loss.
Old practice and simple asset sales book the whole gain.
Fix: Split the gain. Only the gain relating to rights transferred is recognised; the ROU asset is measured at the proportion of the previous carrying amount that relates to the right of use retained.
Measuring the ROU asset at the lease liability or at fair value.
Students copy the ordinary lessee rule.
Fix: Use carrying amount × PV of lease payments ÷ fair value.
Ignoring the sale test and using sale accounting when control has not passed.
The word 'sale' appears in the question.
Fix: Check Ind AS 115 first. If it fails, keep the asset and record a financial liability equal to proceeds.
Putting the above-market excess into gain.
Cash received is higher, so students raise the gain.
Fix: Use fair value for the gain. Show the excess as a financial liability.
Including the financing element in the lease liability.
Students discount all payments as lease payments.
Fix: Split PV of payments into the financing portion and the lease portion; only the lease portion is the lease liability.
Forgetting the buyer-lessor's entry.
The question seems to focus on the seller.
Fix: Write both entries when asked. The buyer records the asset at fair value and a financial asset for any excess.

Worked examples

Example 1

Entity S sells a building to Entity B for cash of ₹20,00,000. Carrying amount is ₹10,00,000 and fair value is ₹18,00,000. S leases it back for 18 years at ₹1,20,000 a year, payable at year end. The transfer is a sale under Ind AS 115. PV of the 18 payments at the 4.5% implicit rate is ₹14,59,200, of which ₹2,00,000 relates to additional financing. Show S's entry at commencement.

Show the solution

Price exceeds fair value by ₹20,00,000 − ₹18,00,000 = ₹2,00,000. This is additional financing, a financial liability.
Lease liability = ₹14,59,200 − ₹2,00,000 = ₹12,59,200.
ROU asset = ₹10,00,000 × ₹12,59,200 ÷ ₹18,00,000 = ₹6,99,555 (rounded).
Total gain = ₹18,00,000 − ₹10,00,000 = ₹8,00,000.
Gain relating to rights retained = ₹8,00,000 × ₹12,59,200 ÷ ₹18,00,000 = ₹5,59,645.
Gain recognised = ₹8,00,000 − ₹5,59,645 = ₹2,40,355.
Check: Debit cash 20,00,000 + ROU 6,99,555 = 26,99,555. Credit building 10,00,000 + lease liability 12,59,200 + financial liability 2,00,000 + gain 2,40,355 = 26,99,555.

Answer: Dr Cash ₹20,00,000; Dr ROU asset ₹6,99,555; Cr Building ₹10,00,000; Cr Lease liability ₹12,59,200; Cr Financial liability ₹2,00,000; Cr Gain on rights transferred ₹2,40,355.

Example 2

Entity P sells a machine at its fair value of ₹18,00,000 for cash. Carrying amount is ₹10,00,000. P leases it back for five years. The rate implicit in the lease cannot be readily determined, so P uses its incremental borrowing rate of 3% a year. P determines that the right of use it retains is 25% of the machine, and the present value of the lease payments at 3% is ₹4,50,000, which is the lease liability. The transfer qualifies as a sale. Give P's entry.

Show the solution

Price equals fair value, so there is no off-market adjustment.
Proportion retained = 25% (as determined by P). It agrees with ₹4,50,000 ÷ ₹18,00,000 = 25%.
ROU asset = ₹10,00,000 × 25% = ₹2,50,000.
Total gain = ₹18,00,000 − ₹10,00,000 = ₹8,00,000.
Gain recognised = ₹8,00,000 × 75% = ₹6,00,000.
Check: Dr 18,00,000 + 2,50,000 = 20,50,000. Cr 10,00,000 + 4,50,000 + 6,00,000 = 20,50,000.

Answer: Dr Cash ₹18,00,000; Dr ROU asset ₹2,50,000; Cr Machine ₹10,00,000; Cr Lease liability ₹4,50,000; Cr Gain ₹6,00,000.

Exam tips

Always state the sale test result first. One line earns marks even in a numerical.
Show the fair value adjustment as a separate working: excess is a financial liability, shortfall is a prepayment.
Present the gain split in two lines, retained and transferred, so the examiner can follow it.
In MCQs, watch for the words 'not a sale': the answer is a financial liability equal to proceeds.
Verify your journal entry balances before moving on.

Practice questions from Leases (Ind AS 116)

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?

Apply the Ind AS 115 requirements for transfer of control. If they are satisfied, it is a sale and you use paragraph 100. If not, paragraph 103 applies and it is a financing.

What happens if the sale price is above fair value?

The excess is accounted for as additional financing from the buyer-lessor to the seller-lessee. Sale proceeds are measured at fair value for the gain.

What happens if the sale price is below fair value?

Below-market terms are accounted for as a prepayment of lease payments.

Why is only part of the gain recognised?

The seller-lessee keeps a right to use the asset. So it recognises only the gain relating to the rights transferred to the buyer-lessor.