Sale and leaseback: transfer is a sale

Learning objectives

• Calculate the right-of-use asset retained (the proportion of the previous carrying amount) and the gain or loss on the rights transferred only, after adjusting for off-market terms (prepayment or additional financing).L3, L4
• Explain the subsequent measurement of the seller-lessee's lease liability, determined so that no gain or loss is recognised on the right of use retained, and the accounting by the buyer-lessor.L3, L4

Normative references

• IFRS 16 §100If the transfer is a sale under IFRS 15: the seller-lessee measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained, and recognises only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor; the buyer-lessor accounts for the purchase applying applicable standards and for the lease applying the lessor accounting requirements.
• IFRS 16 §101If the fair value of the consideration for the sale does not equal the fair value of the asset, or if the lease payments are not at market rates, the entity makes adjustments to measure the sale proceeds at fair value: below-market terms are accounted for as a prepayment of lease payments, and above-market terms as additional financing provided by the buyer-lessor to the seller-lessee.
• IFRS 16 §102The adjustment in paragraph 101 is measured on the basis of the more readily determinable of the difference between the fair value of the consideration and the fair value of the asset, and the difference between the present value of the contractual lease payments and the present value of payments at market rates.
• IFRS 16 §102AAfter the commencement date, the seller-lessee applies paragraphs 29 to 35 to the right-of-use asset and paragraphs 36 to 46 to the lease liability arising from the leaseback. In doing so, it determines the lease payments or revised lease payments in a way that it would not recognise any gain or loss that relates to the right of use retained; this does not prevent it from recognising in profit or loss any gain or loss relating to the partial or full termination of a lease.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

9 questions

• The conclusion of the IFRS 15 analysis of a sale and leaseback governs the whole of its subsequent accounting. Which statements about the consequences of that conclusion are correct?L2
• Granvelle transfers an office building to the investor Pierreval and leases it back for 8 years. According to the IFRS 15 analysis provided, the transfer is a sale. Which of the following statements correctly describes the accounting by both parties?L3
• Hestan transfers a warehouse to a property fund for {sale_price}, equal to the fair value of the warehouse, and leases it back; according to the IFRS 15 analysis provided, the transfer is a sale. The carrying amount of the warehouse is {carrying_amount}. The present value of the leaseback payments, payable at the end of each year, is {pv_lease_payments}. Case assumption: the proportion of the right of use retained is measured as the ratio of that present value to the fair value of the warehouse. Compute the right-of-use asset and the gain recognised on the disposal.L3
• The hotel group Solvène sells a hotel to a property company for {sale_price}, a price equal to the fair value of the hotel, whose carrying amount is {carrying_amount}. The attached IFRS 15 analysis concludes that there is a sale. Solvène leases the hotel back for {lease_term} years for an annual payment of {annual_payment} paid at the end of each year; the discount rate used is {discount_rate} and the corresponding rounded annuity factor is {annuity_factor}. Case assumption: the proportion of the right of use retained is the ratio of the present value of the lease payments to the fair value of the hotel. Determine the lease liability, the right-of-use asset and the gain recognised on the disposal.L4
• Ombrelle transfers its research centre to an insurer and leases it back for 9 years; the IFRS 15 analysis in the file concludes that the transfer is a sale. The price received, {sale_price}, equals the fair value of the centre; its carrying amount (presented net in a single account) is {carrying_amount}. The present value of the lease payments, payable at the end of each year, is {pv_lease_payments}. Case assumption: the proportion of the right retained is the ratio of that present value to fair value. Record Ombrelle's entry at the transaction date.L3
• To finance its growth, the dairy cooperative Brumelac sells its packaging unit to a finance company and continues to operate it under a 6-year lease. Data: sale price {sale_price}, equal to fair value; carrying amount of the unit {carrying_amount} (net, in a single account); present value of the lease payments payable at the end of each year {pv_lease_payments}. The IFRS 15 analysis concludes that there is a sale, and the proportion retained is measured, as an assumption, by the ratio of the present value of the lease payments to fair value. Record the transaction in Brumelac's books.L4
• Arvelo sells a business building to Capimmo for {sale_price} and leases it back; the IFRS 15 analysis concludes that there is a sale. The fair value of the building, readily determinable, is {fair_value}; its carrying amount is {carrying_amount}. Arvelo uses, as the more readily determinable basis, the difference between the fair value of the consideration and that of the building. The contractual lease payments, payable at the end of each year, have a present value of {pv_contractual_payments}, part of which repays the excess price (case assumption: its present value equals that excess). The proportion of the right retained is measured, as an assumption, by the ratio of the present value of the payments relating to the lease to fair value. Compute the additional financing, the right-of-use asset and the gain recognised.L4
• Lusinor transfers a warehouse to an investor for 850,000 and leases it back at below-market lease payments; the IFRS 15 analysis concludes that there is a sale. The fair value of the warehouse, readily determinable, is 1,000,000, and Lusinor uses the difference in fair values as the more readily determinable basis. How should the difference of 150,000 be treated?L3
• Calyse carried out a sale and leaseback of a store that qualified as a sale; part of the leaseback payments varies with the store's revenue. A year later, revenue falls and the controller proposes to reduce the lease liability for the now lower variable portion, recognising a gain in profit or loss on the right of use retained. Part of the store is also subject to a partial termination negotiated with the lessor. Which analysis complies with IFRS 16?L4