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Sale and leaseback: IFRS® Accounting Standards vs US GAAP

Seller-lessee accounting for sale-and-leaseback transactions under IFRS 16 versus ASC Topic 842.

 

From the IFRS Institute – September 7, 2023

Sale-and-leaseback arrangements can be uniquely structured with accounting implications that are often not intuitive. The accounting depends on whether the transfer of the underlying asset to the buyer-lessor qualifies as a sale. If it does, sale-and-leaseback accounting applies and complexities can arise, such as accounting for variable lease payments under the leaseback. Otherwise, the transaction is considered a failed sale and treated as a financing arrangement. In this article, we review the key accounting considerations from a seller-lessee’s point of view under IFRS Accounting Standards, and major differences with US GAAP.

Overview of sale and leaseback transactions

Sale-and-leaseback transactions are a popular financing mechanism wherein a seller-lessee sells an asset to a buyer-lessor and simultaneously agrees to lease the same asset back. These transactions can be structured in a variety of ways to benefit both parties.

The seller-lessee benefits by receiving immediate cash financing at potentially lower cost as compared to conventional loans with flexibility in collateral, loan covenants, closing costs and payment schedules, while retaining the right to use the asset in its operations.

The buyer-lessor can generally control its return on investment (ROI) by negotiating payment and other terms in the agreement and record a consistent stream of income for the lease term. Further, as compared to conventional loans, the buyer-lessor may obtain greater tax benefits (e.g. from tax depreciation of the asset) and have lower risk with regarding the seller-lessee’s credit worthiness given its ownership rights to the underlying asset.

Sale-and-leaseback accounting

Both IFRS Accounting Standards and US GAAP address sale-and-leaseback accounting, in their respective lease standards, IFRS 161 and Topic 8422. In both frameworks, the gating accounting question is whether a sale of the underlying asset has occurred under the requirements of their generally converged revenue standards i.e. IFRS 153 and Topic 6064, respectively. This is critical because if there is no sale then the transaction is accounted for as a financing arrangement3.

The approach under IFRS Accounting Standards is illustrated in the following decision tree, also available in KPMG publication Sale and leaseback - For lessees and sessors:

And while US GAAP takes a similar approach to determining whether a sale occurs, there are some differences, as well as many other significant differences with IFRS Accounting Standards when sale-and-leaseback accounting applies.

Let’s explore further the seller-lessee's accounting under IFRS Accounting Standards and the main differences compared to US GAAP.

Is there a sale?

The first step in accounting for a sale-and-leaseback transaction is to consider whether the transfer of the asset by the seller-lessee to the buyer-lessor satisfies the requirements in IFRS 15 to be accounted for as a sale of the asset. Some of the features that commonly preclude a transfer from being a sale include the following:

  • Seller-lessee repurchase option – e.g. call option or forward, if substantive;
  • Seller-lessee’s renewal option, if similar in economic substance to a purchase option;
  • Certain buyer-lessor put options; and
  • Classification of the leaseback as a finance lease by the buyer-lessor, except in rare circumstances.

Comparison to US GAAP

Unlike IFRS Accounting Standards, under US GAAP, if the seller-lessee has a substantive option to repurchase the asset, then the transfer may still qualify as a sale if the asset is not real estate and both:

  • the strike price to repurchase the asset is its fair value at the date of exercise; and
  • assets substantially the same as the underlying asset are readily available in the marketplace.

Further, unlike IFRS Accounting Standards, under US GAAP, if the leaseback would be classified as a finance lease by the seller-lessee (or as a sales-type lease by the buyer-lessor), then sale recognition is automatically precluded.

Seller-lessee accounting when the transfer qualifies as a sale

If the transfer of the underlying asset qualifies as a sale, then the seller-lessee derecognizes the underlying asset and applies the lessee accounting model in IFRS 16 to the leaseback as follows:

  • recognizes a right-of-use (ROU) asset, measured as the proportion of the previous carrying amount of the asset representing the right of use retained by the seller-lessee; and
  • recognizes a lease liability at the present value of the payments under the leaseback.

Some other considerations around initial recognition are:

  • IFRS 16 recognition exemptions: The seller-lessee may elect to not record the ROU assets or lease liability if the leaseback is short-term or for low-value assets.

  • Off-market terms: If the sale and leaseback is not on market terms, then the seller-lessee:
    • recognizes the sale proceeds at fair value; and
    • accounts for any below-market terms as a prepayment of lease payments and any above-market terms as additional financing received from the buyer-lessor.
       
  • Gain recognition: The seller-lessee recognizes a gain or loss related to the rights in the underlying asset transferred to the buyer-lessor. It does not recognize a gain or loss related to the rights to the underlying asset it retained via the leaseback. That is, the gain or loss recognized by the seller-lessee is a portion of the difference between the sales proceeds and carrying amount of the underlying asset.

  • Leaseback with variable payments: The seller-lessee includes estimated variable lease payments when it measures the lease liability arising from the sale and leaseback. This means that even if all the lease payments are variable, the seller-lessee always recognizes a lease liability. Additionally, the subsequent measurement requirements for these leasebacks ensure that no incremental gains or losses (i.e. beyond those recognized initially on asset transfer) arise from remeasurement or other events that do not transfer additional rights in the underlying asset to the buyer-lessor.

Comparison to US GAAP

Like IFRS 16, under US GAAP, the seller-lessee derecognizes the underlying asset and applies the lessee accounting model to the leaseback, which includes applying the short-term lease exemption if the seller-lessee has elected this exemption for that class of underlying asset. The seller-lessee also adjusts its sale-and-leaseback accounting for any off-market terms.

Unlike IFRS 16, the seller-lessee:

  • does not include estimated variable lease payments based on performance or usage in measuring the lease liability;
  • the ROU asset is measured in the same manner as for any other lease, which means it can be zero (e.g. if the lease liability is zero and there are no lease prepayments or capitalizable initial direct costs); and
  • recognizes a gain or loss for the full difference between the sale proceeds and the carrying amount of the underlying asset.

Seller-lessee accounting when the transfer is a failed sale

Accounting for a failed sale differs significantly from the sale-and-leaseback accounting model described above. The seller-lessee:

  • continues to recognize the underlying asset;
  • recognizes a financial liability that is not a lease liability equal to the transfer proceeds, subsequently accounted for under IFRS 95; and
  • does not recognize a gain or loss on the transfer of the underlying asset.
     

A failed sale conclusion is not permanent; it is reassessed based on changes to relevant facts and circumstances. Generally, the passage of time alone would not result in a reassessment unless the passage of time results in the expiration of a repurchase option that was precluding sale recognition.

Comparison to US GAAP

Like IFRS Accounting Standards, under US GAAP, a failed sale is accounted for as a financing and a failed sale conclusion is reassessed when relevant facts and circumstances change. However, accounting differences arise because of differences between the IFRS 9 and the US GAAP financial instruments guidance.

The takeaway

Sale-and-leaseback transactions are likely to remain a popular financing vehicle, notwithstanding the accounting and reporting challenges. For many companies, these transactions are infrequent but very material and can attract external scrutiny. Seller-lessees should be ready to document their accounting judgments based on the particular terms and conditions of an arrangement; it is often difficult to replicate an accounting analysis from one deal to the next.

Planning a sale and leaseback? Reach out to your KPMG contact and read KPMG publication Sale and leaseback – For lessees and lessors. For more in-depth guidance on complex areas of IFRS 16 – including lease modifications, lease term, discount rates and real estate leases – visit kpmg.com/ifrs16. For more information on the accounting for sale and leaseback transactions under US GAAP, see chapter 9 of KPMG Handbook, Leases.

Footnotes

  1. IFRS 16, Leases
  2. Topic 842, Leases
  3. IFRS 15, Revenue from Contracts with Customers
  4. Topic 606, Revenue from Contracts with Customers
  5. IFRS 9, Financial Instruments

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Contributing author

Image of Valerie Boissou
Valerie Boissou
Partner, Dept. of Professional Practice, KPMG US
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Image of Vaibhav Poddar
Vaibhav Poddar
Director Advisory, Accounting Advisory Services, KPMG US
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Image of Valerie Boissou
Valerie Boissou
Partner, Dept. of Professional Practice, KPMG US
Read bio
Image of Vaibhav Poddar
Vaibhav Poddar
Director Advisory, Accounting Advisory Services, KPMG US
Read bio

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