Lease Liability in a Sale and Leaseback — Possible project direction (IFRS 16)

Date recorded:


In November 2020, the Board published ED/2020/4 Lease Liability in a Sale and Leaseback, which proposed to amend IFRS 16. The Board discussed a summary of feedback on the ED and provided initial thoughts on the feedback. This project originated from the Committee's recommendation to the Board to undertake a project that addresses the subsequent measurement of a liability that arises in a sale and leaseback transaction. For details on the proposed amendments, please see our IFRS in Focus on the ED.


From the 87 responses to the ED, a large majority agreed that there is a need to amend IFRS 16 to enhance the measurement requirements for sale and leaseback transactions. Nonetheless, most of them disagreed with, or expressed concerns about various aspects of the proposals. Many of them said that including expected variable lease payments linked to future performance in the measurement of leaseback liabilities raises practical and conceptual challenges and differing the measurement reduces comparability and understandability for users of financial statements. Some respondents suggested two main alternatives, the 'componentised liability approach' and the 'imputed payments approach'. The staff did not recommend either approach to the Board and their views and reasons are set out in the agenda paper.

Possible ways forward

The Board proposed no change to the initial measurement requirements of sale and leaseback transactions already in IFRS 16 but to propose amendments to "fill a gap" in the subsequent measurement requirements. The staff considered two possible approaches to the subsequent measurement of the leaseback liability, the ‘expected payments approach’ and the ‘imputed payments approach’.

The Board originally proposed that the amendments should be applied to any form of variable payments, including those that depend on an index or rate. To alleviate some of the practical concerns of the new requirements from the feedback, the Board could consider narrowing the scope of their application to a smaller population of sale and leaseback transactions. The staff considered the new requirements could apply only to sale and leaseback transactions with variable payments linked to future performance or use of the underlying asset; or to sale and leaseback transactions for which the initial measurement of the leaseback liability recognised and measured as a result of applying IFRS 16:100(a) differs materially from the initial measurement of that liability applying IFRS 16:26-28.

The staff expects that this alternative would exclude from the scope of any new requirements those sale and leaseback transactions with leaseback payments that are fixed or depend on an index or rate for which the lease term is not long or the expected change in the index or rate is low.

Staff's questions to the Committee members

The staff sought the Committee members' views on the possible project directionwhether the Committee members (i) support either the two approaches suggested by the staff or other approaches suggested by the respondents of the feedback, or others; and (ii) support reducing the population of the applicable sale and leaseback transactions.


There was a long and lively discussion on the possible project direction. Most of the Committee members considered the expected payment approach to be the better approach as an interim solution to fill the gap before the Board's post-implementation review ("PIR") on IFRS 16 is completed. However, some of the Committee members considered none of the approaches perfect and suggested to leave it open for the entity to choose an accounting policy until the PIR is finalised.

Those who supported the expected payment approach considered sale and leaseback transactions as highly structured transactions and thus the counterparties to the arrangements should have an expectation/idea on the future cash flows even if it is based on the future performance. Therefore, this approach reflects the economic substance of such an arrangement and the resulting presentation in financial statements provides useful information to readers. A few of them supported no subsequent remeasurement for simplicity as proposed by the Board. However, similar to the reactions from stakeholders, some of the Committee members were not comfortable with not remeasuring the lease liabilities subsequently when the actual payments differ from the initial expectation. Instead, they said modification should be considered in a similar way to that of modification of financial liabilities in IFRS 9.

Some Committee members said they understood why the deferred gain approach was not recommended because it would modify the initial measurement of the right-of-use asset arising from a leaseback and would move the project outside the intended boundary. However, they showed sympathy to this because they considered that this approach has the merit of sticking to the principle of not recognising a gain on the leased back portion and instead amortising the gain over the lease term.

A few Committee members considered that the expected payment method deviated from the principle in IFRS 16 of not including variable lease payments in measuring lease liabilities. One of the Committee members said that the componentised or the deferred gain approach may be considered in a future rethink of the project. Given there are imperfections in each approach suggested, some Committee members suggested illustrating the preferred one but not mandating it and allowing the flexibility for entities to choose among these approaches before the PIR is done, which is expected not to be far off. Some Committee members also suggested not to recommend any approach and to simply state instead the principles in IFRS 16 for consideration. This way it would be left to entities to select an appropriate approach.

In response to the question of reducing the population of applicable transactions, most of the Committee members agreed with narrowing the scope to sale and leaseback transactions with payment linked to future performance only. However, some of them said they were confused/concerned about the materiality consideration because they were not sure how it is assessed. Only a few of them did not agree with narrowing the scope because they considered it may create differences in accounting among different sale and leaseback transactions.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.