What is the nature of a sale-leaseback transaction?

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What is the nature of a sale-leaseback transaction?

THE NATURE OF LEASEBACKS A sale and leaseback, or more simply, a leaseback, is a contract between a seller and a buyer where the former sells an asset to the latter and then enters into a second contract to lease the asset back from the buyer.

Q. How do you account for sale and leaseback transaction?

What is Sale-Leaseback Accounting?

  1. Compare the difference between the sale price of the asset and its fair value.
  2. Compare the present value of the lease payments and the present value of market rental payments. This can include an estimation of any variable lease payments reasonably expected to be made.

Q. How does a sale-leaseback transaction work?

In a sale-leaseback transaction, the seller of the asset becomes the lessee and the purchaser becomes the lessor. A sale-leaseback enables a company to sell an asset to raise capital, then lets the company lease that asset back from the purchaser.

Q. What happens when a sale and leaseback occur?

A sale-leaseback transaction occurs when an entity sells an asset it owns and immediately leases the asset back from the buyer. The seller then becomes the lessee and the buyer becomes the lessor. These types of transactions impact the accounting for both the seller-lessee and buyer-lessor.

Q. What is the advantage of sale and leaseback?

The main tax advantage of a valid sale-leaseback is that rental payments under the lease are fully deductible. With conventional mortgage financing, a borrower deducts interest and depreciation only.

Q. How is a sale and leaseback transaction structured?

Usually, in transactions structured as described above, the entity buying the asset from a manufacturer or a dealer does not control the asset and such a transaction is accounted for as a regular lease.

Q. When is sale and leaseback not accounted for in IFRS 16?

If the seller-lessee did not control the asset before it was transferred to the lessor, the whole transaction is not accounted for a sale and leaseback, but as a regular lease (IFRS 16.B45-B47). The assessment of whether an entity controlled the asset before it was transferred to a lessor can be made based on paragraph IFRS 15.33.

Q. How is right of use determined in sale and leaseback?

When the transfer of the asset is a sale, a 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 by the seller-lessee (IFRS 16.100a).

Q. When does the buyer-lessor account for the sale of an asset?

See paragraphs IFRS 16.BC266-BC267 for more discussion and Example 24 accompanying IFRS 16. When the transfer of the asset is a sale, the buyer-lessor accounts for the purchase of an asset according to applicable IFRS (e.g. IAS 2, IAS 16, IAS 38) and accounts for the lease using lease requirements included in IFRS 16 (IFRS 16.100 (b)).

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