Potential change to IFRS 16 in sale and leaseback transactions

12 September 2021

The International Accounting Standards Board (IASB) is proposing an amendment to IFRS 16 which will specify how a company initially measures the right-of-use asset and corresponding lease liability, arising in a sale and lease back transaction, and how the seller-lessee subsequently measures the lease liability.

IFRS 16 currently stipulates how to initially account for sale and leaseback transactions when the transaction takes place. However, it does not specify how to measure the lease liability when reporting after that date.

The proposed amendment requires the seller-lessee to initially measure 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. The seller-lessee measures the lease liability at the present value of the expected lease payments that are unpaid at the commencement date, discounted at an appropriate rate in accordance with the requirements of IFRS 16.

Expected lease payments would comprise the following payments relating to the right-to-use asset during the lease term at market rates:

  • fixed payments (including in-substance fixed payments), less any lease incentives;
  • variable lease payments (regardless of whether they depend on an index or a rate);
  • amounts expected to be payable by the seller-lessee under residual value guarantees; and
  • payments of penalties for terminating the lease, if the lease term reflects the seller-lessee exercising an option to terminate the lease.

At subsequent reporting dates, the right-of-use asset arising from the leaseback would be remeasured under the existing guidance in IFRS 16. However, the lease liability arising from the leaseback would be measured by:

  • increasing the carrying amount to reflect interest on the lease liability;
  • reducing the carrying amount to reflect the expected lease payments for the reporting period;
  • remeasuring the carrying amount to reflect any reassessment or lease modification, but not a change in future variable lease payments; and
  • recognising any difference between the actual payments made for the lease and the expected lease payments for the reporting period.
  • The proposed amendment would not change the accounting for leases, other than those arising in a sale and leaseback transaction.

The exposure draft is open for comment until 29 March 2021.

If you have any further queries, please contact Helen Jones or Paul Merris.