IFRS 16 — Sale and leaseback with variable payments

Date recorded:

Agenda Paper 2


In its November 2019 meeting, the Committee discussed a submission about a sale and leaseback transaction with variable payments. In the fact pattern described, the entity (seller-lessee) enters into a sale and leaseback transaction whereby it transfers the asset to another entity (buyer-lessor) and leases back the asset for ten years with variable lease payments based on a percentage of the seller-lessee's revenue derived from that asset. The transfer satisfies the requirements of IFRS 15 to be accounted for as a sale of an asset. The submitter asks how the seller-lessee measures the right-of-use (ROU) asset arising from the leaseback, whether it is (i) zero because of variable lease payments, based on the measurement requirements of IFRS 16:24, or (ii) a proportion of the asset's previous carrying amount, based on the requirements in IFRS 16:100(a)). The amount of ROU asset would determine the amount of gain or loss recognised at the date of the transaction. The Committee members generally agreed with the analysis that a portion of that asset's previous carrying amount should be recognised as an ROU asset in accordance with IFRS 16:100(a).

In the meeting, some Committee members raised the concerns on the liability entry and asked whether the seller-lessee should account for the liability as a lease liability applying IFRS 16 or a financial liability applying IFRS 9. The staff were asked to analyse further the seller-lessee's accounting for the liability arising from a sale and leaseback transaction.

Staff analysis

The staff conclude that the lease liability generally meets the definition of a financial liability in IAS 32 because the seller-lessee is obliged to make payments to the buyer-lessor over the lease term. In a sale and leaseback transaction, the seller-lessee transfers the underlying asset to the buyer-lessor and then immediately obtains the right to control the use of the asset in exchange for payments to the buyer-lessor. Therefore, the seller-lessee's obligation to make payments to the buyer-lessor relate to a lease. This aligns with IFRS 16:100(a) that specifies the seller-lessee's measurement of the ROU asset arising from the leaseback, which implies the liability is related to obtaining that right of use. Therefore, the financial liability is a lease liability to which IFRS 16 applies. It is consequently not in the scope of IFRS 9, as IFRS 9:2.1(b) excludes "rights and obligations under leases to which IFRS 16 applies".

Based on the limited research performed (on ten entities), most consider the liability arising from a sale and leaseback transaction as a lease liability within the scope of IFRS 16 instead of an IFRS 9 financial liability. But the staff could not determine whether for those the leaseback payments were variable or not.

Applying IFRS 16:100(a), the lease liability is determined by the measurement of the ROU asset and the gain or loss on the transaction recognised at the date of transaction. However, IFRS 16 does not specify how the seller-lessee accounts for the ROU asset and the lease liability after the date of transaction. Although the leaseback payments, which are linked to the revenue, do not meet the definition of lease payments in IFRS 16, the staff are of the view that the seller-lessee could apply IFRS 16:36–38 largely as it would for any other lease liability. The staff illustrated that the lease liability is subsequently increased by interest accrual and reduced by the expected payments. Any difference between the actual amount paid and the amount included in the lease liability are variable payments and therefore recognised in profit or loss. The lease liability is neither required nor permitted to be remeasured because the payment is not dependent on an index or rate.

The staff acknowledge that the subsequent measurement requirements for the lease liability resulting from the sale and leaseback is not as complete as it could be and that variable lease payments may occur more frequently in the future. Therefore, an amendment to IFRS 16 is proposed to enhance and clarify the application of IFRS 16:36–38 to such a lease liability. This amendment would be by way of an Annual Improvement.

Staff recommendation

Regarding the accounting of such a sale and leaseback transaction at the date of the transaction, the staff recommended that the Committee not develop an Interpretation. However, they did recommend that the IASB propose an Annual Improvement that clarifies how the seller-lessee measures the lease liability.


In general, the Committee agreed with the staff analysis for the day 1 accounting of the sale and leaseback with variable lease payments as illustrated in Example 24 in IFRS 16:IE11. Regarding the "value" of the ROU asset retained by the seller-lessee, some Committee members considered it is unclear what "value" means. One Committee member considered it to be fair value. But some disagreed and considered it to be a portion that relates to the ROU assets retained by the seller-lessee and suggested to take out the word "value". The staff agreed.

The Committee members had a long and lively debate on the accounting for the "liability" by the seller-lessee. Some did not agree with the word "lease liability" being used in the agenda decision because the general principles in IFRS 16:26-27 on the initial recognition and the modification of lease liabilities do not apply to the liability arising from such transaction. Also, variable lease payments that do not depend on an index or rate are specifically scoped out from IFRS 16 as lease liabilities. Therefore, it was suggested to use the word "liabilities within the scope of IFRS 16" instead. But some Committee members considered that the introduction of a new term may result in confusion and it might be difficult to explain. In order to clarify that this liability is scoped into IFRS 16, these Committee members supported keeping the word "lease liability". One of the ways to distinguish it from usual lease liabilities would be to state clearly that IFRS 16:100(a) is applied for the initial recognition of that lease liability and to emphasise that the "modification" in IFRS 16:44 does not apply. Another Committee member suggested that using the word "liability" would give more flexibility. This is because its subsequent measurement was proposed to be further discussed in the subsequent standard-setting project.

Some Committee members considered that the financial liability, representing the residual of the ROU assets retained and the gain or loss on the right transferred, is not merely a lease liability but consists of a deferred gain or a financing component. The staff disagreed and considered that the value is resulting from the mechanics of the pricing of the sale and leaseback contract and it merely represents the obligation of the seller-lessee to pay to the lessor the expected lease payments. Consequently, there are no other non-lease components.

Others suggested to make it clear that IFRS 16 does not prescribe the method used to calculate the portion of the right of use retained by the seller-lessee and the example illustrated (present value of the expected lease payments) is just one way to calculate it. The staff agreed and will emphasise that point in the agenda decision.

The staff also noted that the disclosure requirement in IFRS 16:53(i), which requires the disclosure of gains or losses arising from sales and leaseback transactions.

The Committee decided, by a vote of 10:3, that the day 1 accounting of sale and leaseback transactions is confirmed and Example 24 in IFRS 16:IE11 will be added to the agenda decision for illustration. It is also concluded that a lease liability is recognised on day 1 even though all the lease payments are variable. Regarding the subsequent measurement of the lease liability, all the Committee members agreed on the need for broader standard-setting for this issue.

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