Accounting for a sale and leaseback
How a client accounts for selling an asset and leasing it back under IFRS 16, when the deal is really borrowing, and what the 2022 amendment added.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
An owner-managed manufacturer needs cash for expansion. Its most valuable asset is the factory it owns and works from. A property investor offers to buy the factory and lease it straight back for a long term, so the business can keep operating exactly as before while turning the building into money. The directors see a sale; the bank statement shows a large receipt; the bookkeeper records a disposal and a profit.
Whether that is right depends on a question the bookkeeper did not ask: was it really a sale? Under IFRS 16 the answer can be no, and then the transaction is accounted for as borrowing secured on the factory. This article covers why clients enter these deals, how to decide whether a sale happened, what to record if it did not, and how the 2022 amendment affects the leaseback.
Why clients do sale and leasebacks
The commercial logic is straightforward. A business with capital tied up in property or equipment can release that capital without losing the use of the asset. Investors like the arrangement because they acquire an asset with a tenant already in place. For a small or medium client, it can be easier to arrange than a bank loan, especially where the business has a good asset but limited trading history.
The same features that make it attractive make the accounting important. The client keeps using the asset, often on terms that look much like ownership: a long lease, rentals set to give the investor a return, sometimes an option to buy the asset back. A reader needs to know whether the business has sold an asset or borrowed against it.
Is the transfer a sale under IFRS 15?
IFRS 16, issued in January 2016, replaced IAS 17, IFRIC 4, SIC-15 and SIC-27. A client whose older sale and leasebacks were accounted for under IAS 17 should not assume that treatment still holds; under IFRS 16 the first question is whether the transfer qualifies as a sale, and that question is answered by IFRS 15.
Under IFRS 15, revenue is recognised when a performance obligation is satisfied by transferring a good or service to a customer, which is when the customer obtains control of it. Applied to a sale and leaseback, the question is whether the buyer-lessor has obtained control of the asset.
Read the agreements closely. Terms that let the seller take the asset back, such as an option or obligation to repurchase it, need particular care because they bear directly on whether control has passed. Record the analysis, the clauses relied on and the conclusion. This is a judgement the engagement partner should see.
Not a sale: the asset stays, the cash is a financial liability
ACCA explains that in a sale and leaseback that is not a sale under IFRS 15, the seller keeps the asset on its statement of financial position and recognises the "sales proceeds" as a financial liability under IFRS 9.
For the manufacturer, that means:
- the factory stays on the statement of financial position at its existing carrying amount, and continues to be depreciated;
- no profit on disposal is recognised;
- the cash received is recorded as a financial liability;
- the "rentals" paid to the investor are, in substance, repayments of that liability and interest on it.
Because the liability is measured under IFRS 9, the rules on initial measurement and transaction costs in measuring a loan or investment when first recognised apply to it. The note should describe the arrangement plainly: the factory has been transferred to an investor and leased back, the transfer did not qualify as a sale, and the proceeds are presented as borrowing.
The 2022 amendment on the lease liability
Where the transfer does qualify as a sale, the seller derecognises the asset and accounts for the leaseback as a lessee, and IFRS 16 sets out how the right-of-use asset retained and any gain are measured. Read those paragraphs before recording the transaction.
The leaseback's lease liability then has its own rules. In September 2022 the IASB issued Lease Liability in a Sale and Leaseback, which added subsequent measurement requirements for sale and leaseback transactions to IFRS 16. A client with a qualifying sale and leaseback should have its lease liability measured after commencement in line with those requirements, which are in the standard itself. Check that the working papers for older deals have been revisited since the amendment.
Register entries and disclosure
Achekam lets staff keep a client's lease register under IFRS 16 or IFRS for SMEs Section 20. The register can read a lease from the contract and produce an AI draft of its terms, but the draft is not used until a person confirms it, and every number the AI reads must appear in the contract text.
How the leaseback enters the register depends on the analysis above. If the transfer was a sale, the leaseback is a lease like any other and belongs in the register, with its terms confirmed against the signed agreement. If it was not a sale, the client has no right-of-use asset from the arrangement; the factory stays in property, plant and equipment and the proceeds sit in borrowings, so the agreement belongs in the borrowings working papers rather than being entered as an ordinary lease. The register itself is covered in the IFRS 16 lease register.
For the notes, Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own. A client with a sale and leaseback needs a specific policy explaining how such transactions are assessed and accounted for, and a note describing the arrangement, its key terms and the conclusion reached. Notes take their figures from the mapped trial balance; the narrative is for the preparer to supply.
The IFRS Foundation's IFRS 16 page summarises the standard's single lessee model and records the 2022 amendment on sale and leaseback. When a client mentions that it "sold the building but still works from it", ask for both agreements, the sale and the lease, before anything is posted.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
