In a sale-and-leaseback, the owner of an asset sells it to another party and simultaneously leases it back. Key questions are:

whether the transfer qualifies as a sale, and
how to account for any gain or loss on the sale along with the resulting lease.

Sale vs financing

Both IFRS 16 and ASC 842 refer to IFRS 15 / ASC 606 (Revenue Recognition) to determine if the transfer is a sale (IASB, 2016; Financial Accounting Standards Board, 2016b). If the seller-lessee has a meaningful option or obligation to repurchase the asset, or if the leaseback is for essentially the asset’s entire life (making the “buyer” not obtain control), then no sale is recognized – instead, the transaction is treated as a financing. For example, if a company sells a machine but has an option to buy it back at any time, or if it sells a building and leases it back for 30 years (close to the building’s 30-year life) with no transfer of ownership, the company hasn’t really given up control. In such cases, under both IFRS and US GAAP the seller-lessee continues to recognize the asset on its balance sheet (as if no sale occurred) and recognizes the sale proceeds as a financial liability (a financing obligation) (IASB, 2016; Financial Accounting Standards Board, 2016b). The leaseback payments are not recorded as rent expense; instead, they are split into principal and interest, effectively as repayments on that financing liability. This mirrors the accounting for a loan secured by the underlying asset. No gain or loss is recorded at the time of the transaction (because it’s treated as if there was no sale). Example: A company sells a specialized piece of equipment with a carrying value of $5 million to a financier for $5.2 million and immediately leases it back for five years. If the equipment is so specialized that the company retains control (perhaps through a repurchase option or because the asset can’t be used by anyone else), it will not recognize a sale. The $5.2 million cash proceeds are recorded as a financial liability. The company will continue to depreciate the equipment (as if still the owner) and will record the leaseback payments as interest expense and principal repayment, instead of rental expense.

Successful sale (with leaseback)

If the transaction does meet the criteria for a sale (i.e., control passes to the buyer-lessor), then the leaseback is accounted for as a new lease by the seller-lessee, and any gain or loss on the sale requires special handling:

IFRS 16

The seller-lessee recognizes a partial gain on the sale. Specifically, IFRS 16 says to recognize a gain only for the portion of the asset that was “sold” to the buyer-lessor, while deferring any profit related to the right of use retained by the seller via the leaseback (IASB, 2016). In practice, the gain recognized = total gain × (proportion of the asset’s fair value that was not retained). For example, a company sells a building for $3 million when its carrying amount is $2 million, and leases back 40% of the building’s space for its own use. This is a successful sale (no repurchase option, buyer gets 60% of the building’s use). The total gain is $1 million; under IFRS 16 the company recognizes only $600,000 (the 60% portion corresponding to the part of the asset effectively sold), and defers $400,000. The deferred portion is not kept as a separate liability but rather is implicitly carried in the measurement of the ROU asset: IFRS 16 prescribes that the ROU asset retained is measured at 40% of the previous carrying amount of the building (i.e., $0.8 million), instead of at fair value, thereby “absorbing” the $0.4 million of gain deferral. The result is that the ROU asset is higher than it would be if measured at fair value, and the lessee’s future depreciation is correspondingly higher – effectively releasing the deferred gain over the lease term (IASB, 2016).

US GAAP

If a sale is achieved, ASC 842 has the seller-lessee recognize the full gain or loss immediately (Financial Accounting Standards Board, 2016b). Using the same example, the company would recognize the entire $1 million gain at sale. There is no concept of deferring a portion of the gain in the ROU asset. The seller-lessee then accounts for the leaseback as either an operating or finance lease depending on its classification (most sale-leasebacks are operating leases for the lessee under US GAAP, since to be a finance lease the arrangement would likely fail the sale in the first place).

Off-market adjustments

Both standards require adjusting the sale price and/or leaseback payments to fair value if they are off-market. For instance, if the sale price exceeds fair value, the excess is treated not as additional gain but as additional financing (the difference is recorded as a loan from the buyer-lessor to the seller-lessee). Conversely, if the sale price is below fair value, the shortfall is treated as prepaid rent (the seller-lessee effectively gave a price concession to obtain cheaper rent) (IASB, 2016; Financial Accounting Standards Board, 2016b). These adjustments ensure that the recognized gain or loss reflects a truly market-value sale. After such adjustments, IFRS proceeds with partial gain recognition as described, while US GAAP recognizes the full adjusted gain. In our example, if that $3 million sale was above market by $100,000, then $100,000 would be accounted as a financing (reducing the gain and increasing the lease liability). If the lease payments were off-market (say, higher than market rent), part of the sale gain would be deferred to offset the above-market rent (effectively reducing the ROU asset). The details can be complex, but the net impact is that IFRS often yields a smaller immediate gain on sale-leaseback transactions compared to US GAAP, which can recognize the full gain upfront (KPMG, 2021).

UK GAAP

Historically, under old UK GAAP, sale-leaseback accounting depended on lease classification: finance leasebacks deferred gains, operating leasebacks often recognized gains immediately or over time. Under the new FRS 102, the IFRS 16 approach is adopted. The seller-lessee applies Section 23 (equivalent to IFRS 15) to determine if a sale has occurred; if not, it remains on the books. If a sale is confirmed, the partial gain approach is used, analogous to IFRS 16 (FRC, 2022). This represents a change for UK GAAP reporters, who will now follow the international model of splitting gains. The FRC has provided guidance on this in the FRS 102 amendments. Companies should also be aware that any deferred gain under old GAAP on past sale-leasebacks might need to be reviewed on transition to the new rules.