IFRS 16 — Sales and leaseback with variable payments

Date recorded:

Agenda Paper 3


In its November 2019 and March 2020 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 requirements of IFRS 15 to be accounted for as a sale of an asset. The submitter asked 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 measurement requirements of IFRS 16:24, or (ii) a proportion of the asset's previous carrying amount, based on requirements in IFRS 16:100(a)). The amount of the ROU asset would determine the amount of any gain or loss recognised at the date of the transaction. In the meetings, most Committee members agreed not to develop an Interpretation regarding the accounting of such a sale and leaseback transaction at the date of the transaction. However, they recommended that the IASB propose an Annual Improvement that clarifies the subsequent measurement of the associated liability by the seller-lessee.

Of the 20 responses received to the tentative agenda decision, eight agreed with the Committee's analysis and conclusion. However, these respondents expressed concerns on using "lease liability" to describe the liability arising or recommended amending IFRS 16 to address the matter. The remaining twelve respondents disagreed with the analysis and conclusion.

Staff analysis

Among those who disagreed with the Committee's analysis and conclusion, some noted that the conclusion on the initial measurement of the liability that arises in the sale and leaseback transaction results in the recognition of a liability for variable lease payments which conflicts with the measurement requirement in IFRS 16:27. They agreed on the application of IFRS 16:100(a) to the initial measurement of the ROU asset but not to the initial measurement of liability arising from it and considered IFRS 16:26-28 should apply to the liability instead. Some of these respondents considered IFRS 16:23-28 applies to all leases, including sale and leaseback transactions, in the accounting of the ROU assets and liability, and IFRS 16:100(a) only serves as a guidance on how to apportion the gain on sale. The staff continued to support the seller-lessee applying the requirement in IFRS 16:100(a) instead of IFRS 16:26-28 to the initial measurement of the liability. Although IFRS 16:100(a) does not specify how to measure the associated liability, it is necessary to measure the liability in such way to arrive at the ROU asset and the gain on the rights transferred as required by IFRS 16:100(a). The staff further commented that IFRS 16:BC169 is trying to explain the rationale for IFRS 16:26-28 in a standalone lease but it does not override the applicable requirements in IFRS 16 to sale and leaseback transactions. Furthermore, the staff continued to agree that IFRS 16:100(a) provides adequate basis for an entity to measure the ROU asset and liability at initial recognition and standard-setting is not required.

For those who agreed with the Committee's analysis and conclusion, most expressed concerns that the agenda decision concluded the liability arising in the sale and leaseback transaction as a "lease" liability because the variable lease payments do not meet the definition as a lease liability in IFRS 16 and IFRS 16 did not contemplate a liability arising from such situations. The staff still considered that the liability meets the definition of a lease liability to which IFRS 16 applies. However, considering the feedback and the Board's future narrow-scope standard-setting project which would clarify the nature of the liability and the seller-lessee's subsequent measurement of such liability, the staff recommended removing the reference to "lease" from the description of the liability in the agenda decision.

Staff recommendation

The staff recommended that the Committee finalise the tentative agenda decision with some suggested changes to the wording.


Most of the Committee members agreed to publish the final agenda decision but added some comments on the staff’s proposed changes to the wording of the agenda decision. Some still held the view that the liability arising is a "lease liability" and suggested to retain the term instead of just "liability" as proposed by the staff. They considered that this conclusion had been debated at length in the last meeting and it had been agreed that this term would clearly represent the nature of the liability arising from the sale and leaseback arrangement described in the fact pattern. Others agreed to the proposed change of “lease liability” to "liability" because it allows for flexibility and the planned future amendments to IFRS 16 with regard to the subsequent accounting of such a liability may make its nature clearer.

In relation to the suggested sentence added which described that the ROU asset cannot be nil in accordance with IFRS 16:100(a), some disagreed adding this sentence, because it may place restrictions on the measurement of ROU assets arising from such transactions, e.g. subsequent impairment. The staff explained that the added sentence only clarifies the accounting treatment of an ROU asset on initial recognition but not for subsequent accounting.

The Committee decided, by a vote of 11:3, to finalise the agenda decision with the above suggested amendments to the tentative agenda decision.

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