Background

In its September 2020 meeting, the Committee discussed the applicability of the sale and leaseback requirements in IFRS 16 to a transaction in which an entity sells its equity interest in a subsidiary that holds only a real estate asset and then leases that real estate asset back. In the fact pattern described, an entity owns 100% of the equity interest in a subsidiary which has only one asset: a building which does not meet the definition of a business. The entity sells all of the equity interests in the subsidiary to a third party and loses control over it. The transfer of the building meets the requirements in IFRS 15 for a sale. The entity then enters into a contract to lease back the building from the third party for a period of time. The submitter asks whether the entity should apply the sale and leaseback requirements in IFRS 16:100(a) in its consolidated financial statements and how the gain on the disposal should be calculated. In the meeting, the staff concluded that IFRS 10:25 and B97-B99 apply to the accounting for the loss of control of the subsidiary and IFRS 16:100(a) applies for measuring the ROU asset and the gain on the leaseback arrangement. Most of the Committee members agreed with analysis and agreed not to add the matter to the Committee's standard-setting agenda.

Out of the 19 comment letters received, a few respondents agreed with the analysis and conclusion in the tentative agenda decision. However, most of the respondents suggested adding a standard-setting project because they considered the requirements in IFRS Standards do not provide an adequate basis to support the analysis and conclusion.

Staff analysis

Several respondents considered the Committee's analysis seems to "cherry pick" the requirements in IFRS 10 that are compatible with those in IFRS 16 and result in the gain recognition requirements in IFRS 10:B98(d) being overridden by IFRS 16:100(a). The staff were of the view that overlaying the two sets of requirements did not result in an entity failing to comply with IFRS 10:98(d) because there is another aspect to the loss of control transaction, i.e. the leaseback, which results in adjustment to the amount from the application of IFRS 10:98(d).

Some respondents raised concerns that the application of accounting standards to this fact pattern may not be consistent with other similar situations. For example, in other sales and leaseback transactions, the derecognition requirements in IAS 16, IAS 38 and IAS 40 include specific cross-references to the sale and leaseback requirement in IFRS 16. This shows that there are interactions between these Standards and IFRS 16 so that both Standards could be applied. However, there is no such similar cross-reference in IFRS 10. Moreover, amendments were made to IFRS 10 and IAS 28 for the sale or contribution of assets between an investor and its associate and joint venture to address the conflict between the gain recognition requirements in IFRS 10 and IAS 28. The interaction of the applicable requirements in IFRS 10 and IFRS 16 is similar to that addressed in that amendment. It would therefore be inconsistent to conclude there is no conflict between the requirements between the two Standards. The staff acknowledged that the specific cross references in those Standards remove any doubt about the gain or loss to be recognised on a sale and leaseback transaction. However, the absence of cross-reference in IFRS 10 does not mean that an entity is unable to apply both sets of requirements in accounting for the transaction or that those requirements conflict. The staff also quoted several examples (including an issue discussed in 2018 related to contributing property, plant and equipment to an associate and the interaction between IFRS 9 and IAS 23 for capitalisation of interest expense) where no cross reference was found in one Standard to another but both Standards are applied to the same transaction. The staff went on to explain that IFRS 16:99-103 specify requirements to be applied to sale and leaseback transactions and considered such specification is sufficient to apply IFRS 16 to the fact pattern described.

A number of respondents considered the fact pattern described as relatively narrow and simple and the conclusion in the tentative agenda decision may not be extended to other transactions with variations. They suggested the Board consider more holistically the accounting for transactions involving single-asset entities. The staff recommended that respondents express their concerns about this to the Board in responding to Request for Information—Post-implementation Review of IFRS 10, IFRS 11 and IFRS 12 so that the Board can determine whether any further action is required. Moreover, several respondents suggested adding a standard-setting project to address the matter, particularly, adding a similar cross-reference to IFRS 16 for sale and leaseback requirements within the derecognition requirements in IFRS 10. 

Staff recommendation

The staff asked the Committee whether the principles and requirements in IFRS 10 and IFRS 16 provide an adequate basis for an entity to account for the transaction described in the submission (and therefore accordingly to finalise) the agenda decision or whether in the Committee's view a narrow-scope amendment to the loss of control requirements in IFRS 10 is required.

Discussion

There was a lively discussion among Committee members on whether the agenda decision should be finalised or a narrow-scope standard-setting project is required. The Committee members generally agreed with the outcome of the agenda decision on the specific simple fact pattern described in the submission. However, most of them were concerned about the benefit and utility of publishing the agenda decision.

A few of the Committee members agreed with both the analysis in the agenda decision and with finalising the agenda decision. They considered that the overlaying approach of the two Standards, i.e. applying IFRS 10 for the disposal or transfer of the entity holding the single asset and applying IFRS 16 for the measurement of the gain or loss on the sale and lease back, is clear and smooth flowing. It was therefore not necessary to instigate narrow-scope standard-setting to add a cross reference to IFRS 16 in IFRS 10.

Some Committee members agreed with the outcome of the agenda decision and suggested finalising it, but at the same time, propose a narrow-scope standard-setting project for broader consideration. These members were of the view that the agenda decision's analysis on the simple fact pattern is appropriate. However, when it comes to more complex situations, the application is not clear given there is not enough interaction between IFRS 10 and IFRS 16 currently and it is unclear how to apply the overlaying approach. The staff reminded members that it is generally not recommended to do both as this might create conflict between subsequent standard-setting and what has been set out in the published agenda decision.

The remaining Committee members considered the benefit of finalising the agenda decision may be limited because it is rare to have cases in reality as simple as that described in the fact pattern. Also, it may have unintended consequences if preparers have diverse interpretations of the agenda decision and apply the same principle to other more complicated cases. Accordingly, they considered a standard-setting project was necessary for broader consideration on more complex fact patterns.

The Committee decided, by a majority vote of 9:5, not to finalise the agenda decision but to propose a narrow-scope standard-setting project to the Board.