the ability to direct the use of, and obtain substantially all of the remaining benefits
from, the asset in exchange;
(b) the customer has legal title to the asset – legal title may indicate which party to a
contract has the ability to direct the use of, and obtain substantially all of the
remaining benefits from, an asset or to restrict the access of other entities to those
benefits. Therefore, the transfer of legal title of an asset may indicate that the
customer has obtained control of the asset. If an entity retains legal title solely as a
protection against the customer’s failure to pay, those rights of the entity would
not preclude the customer from obtaining control of an asset;
(c) the entity has transferred physical possession of the asset – the customer’s physical
possession of an asset may indicate that the customer has the ability to direct the
use of, and obtain substantially all of the remaining benefits from, the asset or to
restrict the access of other entities to those benefits. However, physical possession
may not coincide with control of an asset. For example, in some repurchase
agreements and in some consignment arrangements, a customer or consignee may
have physical possession of an asset that the entity controls. Conversely, in some
bill-and-hold arrangements, the entity may have physical possession of an asset
that the customer controls;
(d) the customer has the significant risks and rewards of ownership of the asset – the
transfer of the significant risks and rewards of ownership of an asset to the
customer may indicate that the customer has obtained the ability to direct the use
of, and obtain substantially all of the remaining benefits from, the asset. However,
when evaluating the risks and rewards of ownership of a promised asset, an entity
is required to exclude any risks that give rise to a separate performance obligation
in addition to the performance obligation to transfer the asset. For example, an
entity may have transferred control of an asset to a customer but not yet satisfied
an additional performance obligation to provide maintenance services related to
the transferred asset; and
(e) the customer has accepted the asset – the customer’s acceptance of an asset may
indicate that it has obtained the ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset. [IFRS 15.38].
None of these indicators individually determine whether the buyer-lessor has obtained
control of the underlying asset. Both the seller-lessee and the buyer-lessor must consider
all relevant facts and circumstances to determine whether control has transferred.
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Furthermore, not all of the indicators must be present to determine that the buyer-lessor
has gained control. Rather, the indicators are factors that are often present when a
customer has obtained control of an asset and the list is meant to help entities apply the
principle of control. See Chapter 28 at 8.3.
The IASB noted that the existence of a leaseback, in isolation, does not preclude a sale.
This is because a lease is different from the sale or purchase of an underlying asset, as a
lease does not transfer control of the underlying asset. Instead, it transfers the right to
control the use of the underlying asset for the period of the lease. However, if the seller-
lessee has a substantive repurchase option for the underlying asset (i.e. a right to
repurchase the asset), no sale has occurred because the buyer-lessor has not obtained
control of the asset. [IFRS 16.BC262].
These requirements are a significant change from current practice for seller-lessees as
they must apply the requirements of IFRS 15 to determine whether a sale has occurred.
IFRS 16 does not address whether a lessee’s renewal options (e.g. fixed price, fair value
at the date of exercise) permitting the seller-lessee to extend the lease for substantially
all of the remaining economic life of the underlying asset precludes sale accounting. We
believe that a lessee that has an option to extend a lease for substantially all of the
remaining economic life of the underlying asset is, economically, in a similar position to
a lessee that has an option to purchase the underlying asset. Therefore, when the
renewal price is not fair value – at the time the renewal option is exercised – the
renewal option would prohibit sale accounting under IFRS 15 and IFRS 16.
8.2
Transactions in which the transfer of an asset is a sale
8.2.1
Accounting for the sale
If the transfer of an asset by the seller-lessee satisfies the requirements of IFRS 15 to be
accounted for as a sale of the asset:
(a) the seller-lessee measures the right-of-use asset arising from the leaseback at the
proportion of the previous carrying amount of the asset that relates to the right of use
retained by the seller-lessee. Accordingly, the seller-lessee recognises only the amount
of any gain or loss that relates to the rights transferred to the buyer-lessor; and
(b) the buyer-lessor accounts for the purchase of the asset applying applicable
Standards, and for the lease applying the lessor accounting requirements in this
Standard. [IFRS 16.100].
Although not explicitly stated in IFRS 16, we believe that if the sale and leaseback
transaction results in a loss to the seller-lessee, that loss will not be deferred. In addition,
the seller-lessee may also need to consider whether this would require the asset to have
been classified as held-for-sale under IFRS 5 (see Chapter 4) and hence subject to
potential impairment prior to the transaction.
8.2.2
Accounting for the leaseback
When a sale occurs, both the seller-lessee and the buyer-lessor account for the leaseback
in the same manner as any other lease, with adjustments for off-market terms. Specifically,
a seller-lessee recognises a lease liability and right-of-use asset for the leaseback (subject
to the optional exemptions for short-term leases and leases of low-value assets).
Leases (IFRS 16) 1759
8.2.3
Adjustment for off-market terms
The sale transaction and the ensuing lease are generally interdependent and negotiated as
a package. Consequently, some transactions could be structured with a negotiated sales
price that is above or below the asset’s fair value and with lease payments for the ensuing
lease that are above or below the market rates. These off-market terms could distort the
gain or loss on the sale and the recognition of lease expense and lease income for the
lease. To ensure that the gain or loss on the sale and the lease-related assets and liabilities
associated with such transactions are neither understated nor overstated, IFRS 16 requires
adjustments for any off-market terms of sale and leaseback transactions, on the more
readily determinable basis of the difference between the fair value of the consideration
for the sale and the fair value of the asset and the difference between the present value of
the contractual payments for the lease and the present value of payments for the lease at
market rates. [IFRS 16.102]. An entity is required to account for any below-market and
above-market terms as a prepayment of lease paym
ents and additional financing provided
by the buyer-lessor to the seller-lessee, respectively. [IFRS 16.101].
IFRS 16 defines fair value solely for the purpose of applying lessor accounting
requirements but not for the purpose of applying sale and leaseback accounting in the
standard. [IFRS 16 Appendix A]. Since IFRS 16 does not address fair value outside of lessor
accounting, we believe it is appropriate to look to IFRS 13 – Fair Value Measurement,
for sale and leaseback accounting (i.e. for determining the fair value of the asset sold
and determining the resulting gain or loss), given IFRS 13 is also applicable to the
measurement of fair value under IFRS 15. The IASB also acknowledged this linkage
between IFRS 13 and IFRS 15 in IFRS 16’s Basis for Conclusion paragraph 266.
Example 24.22: Sale and leaseback transaction (IFRS 16 Illustrative Example 24)
[IFRS 16.IE11]
An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of CU2,000,000. Immediately
before the transaction, the building is carried at a cost of CU1,000,000. At the same time, Seller-lessee enters into
a contract with Buyer-lessor for the right to use the building for 18 years, with annual payments of CU120,000
payable at the end of each year. The terms and conditions of the transaction are such that the transfer of the building
by Seller-lessee satisfies the requirements for determining when a performance obligation is satisfied in IFRS 15.
Accordingly, Seller-lessee and Buyer-lessor account for the transaction as a sale and leaseback. This example
ignores any initial direct costs.
The fair value of the building at the date of sale is CU1,800,000. Because the consideration for the sale of the
building is not at fair value Seller-lessee and Buyer-lessor make adjustments to measure the sale proceeds at
fair value. The amount of the excess sale price of CU200,000 (CU2,000,000 – CU1,800,000) is recognised
as additional financing provided by Buyer-lessor to Seller-lessee.
The interest rate implicit in the lease is 4.5 per cent per annum, which is readily determinable by Seller-lessee.
The present value of the annual payments (18 payments of CU120,000, discounted at 4.5 per cent per annum)
amounts to CU1,459,200, of which CU200,000 relates to the additional financing and CU1,259,200 relates
to the lease – corresponding to 18 annual payments of CU16,447 and CU103,553, respectively.
Buyer-lessor classifies the lease of the building as an operating lease.
Seller-lessee
At the commencement date, Seller-lessee measures the right-of-use asset arising from the leaseback of the
building at the proportion of the previous carrying amount of the building that relates to the right-of-use retained
by Seller-lessee, which is CU699,555. This is calculated as: CU1,000,000 (the carrying amount of the building)
÷ CU1,800,000 (the fair value of the building) × CU1,259,200 (the discounted lease payments for the 18-year
right-of-use asset).
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Seller-lessee recognises only the amount of the gain that relates to the rights transferred to Buyer-lessor of
CU240,355 calculated as follows. The gain on sale of building amounts to CU800,000 (CU1,800,000 –
CU1,000,000), of which:
(a) CU559,645 (CU800,000 ÷ CU1,800,000 × CU1,259,200) relates to the right to use the building retained
by Seller-lessee; and
(b) CU240,355 (CU800,000 ÷ CU1,800,000 × (CU1,800,000 – CU1,259,200)) relates to the rights
transferred to Buyer-lessor.
At the commencement date, Seller-lessee accounts for the transaction as follows.
Cash
CU2,000,000
Right-of-use asset
CU699,555
Building
CU1,000,000
Financial
liability
CU1,459,200
Gain on rights transferred
CU240,355
Buyer-lessor
At the commencement date, Buyer-lessor accounts for the transaction as follows.
Building
CU1,800,000
Financial asset
CU200,000*
Cash
CU2,000,000
* 18 payments of CU16,447, discounted at 4.5 per cent per annum
After the commencement date, Buyer-lessor accounts for the lease by treating CU103,553 of the annual payments
of CU120,000 as lease payments. The remaining CU16,447 of annual payments received from Seller-lessee are
accounted for as (a) payments received to settle the financial asset of CU200,000 and (b) interest revenue.
8.3
Transactions in which the transfer of an asset is not a sale
If the transfer of an asset by the seller-lessee does not satisfy the requirements of
IFRS 15 to be accounted for as a sale of the asset:
(a) the seller-lessee continues to recognise the transferred asset and recognises a
financial liability equal to the transfer proceeds. It accounts for the financial
liability applying IFRS 9; and
(b) the buyer-lessor does not recognise the transferred asset and recognises a financial
asset equal to the transfer proceeds. It accounts for the financial asset applying
IFRS 9. [IFRS 16.103].
8.4 Disclosures
A seller-lessee may need to provide additional information relating to sale and
leaseback transactions to satisfy the disclosure objective. This could include
information that helps users of financial statements to assess, for example:
Leases (IFRS 16) 1761
(a) the lessee’s reasons for sale and leaseback transactions and the prevalence of those
transactions;
(b) key terms and conditions of individual sale and leaseback transactions;
(c) payments not included in the measurement of lease liabilities; and
(d) the cash flow effect of sale and leaseback transactions in the reporting period.
[IFRS 16.B52].
A seller-lessee is also required to disclose any gains and losses arising from sale and leaseback
transactions separately from gains and losses on disposals of other assets. [IFRS 16.53(i)].
9 BUSINESS
COMBINATIONS
9.1
Acquiree in a business combination is a lessee
Consequential amendments to IFRS 3 – Business Combinations – specify the initial
measurement requirements for leases that are acquired in a business combination.
Paragraph 28A has been added to IFRS 3 to clarify that the acquirer recognises right-
of-use assets and lease liabilities for leases identified in accordance with IFRS 16 in
which the acquiree is the lessee. The acquirer is not required to recognise right-of-use
assets and lease liabilities for:
(a) leases for which the lease term ends within 12 months of the acquisition date; or
(b) leases for which the underlying asset is of low-value.
As part of the consequential amendments to other standards arising from IFRS 16,
paragraph 28B has been added to IFRS 3 to clarify that the acquirer measures the lease
liability at the present value of the remaining lease payments as if the acquired lease were
a new lease at the acquisition date. The acquirer measures the right-of-use asset at the
same amount as the lease liability, adjusted to reflect favourable or unfavourable terms of
the lease when compared with market terms. Because the off-market nature of the lease
is captured in the right-of-use asset, the acquirer does not separately recognise an
in
tangible asset or liability for favourable or unfavourable lease terms relative to market.
The acquirer is not required to recognise assets and liabilities relating to off-market terms
for short-term leases and leases of low-value assets, as the IASB expect that the effect of
off-market terms will rarely be material for these contracts. [IFRS 16.BC298].
The subsequent measurement requirements for an acquired lease liability and right-of-
use asset are the same as the requirements for any other existing lease arrangement.
9.2
Acquiree in a business combination is a lessor
Paragraph 17 of IFRS 3 has been amended to require an acquirer to classify acquired lessor
leases as either finance or operating leases using the contractual terms and conditions at
the inception of the lease, or, if the terms of the contract have been modified in a manner
that would change its classification, at the date of that modification. Therefore, the
classification is not changed as a result of a business combination unless a lease is modified.
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10
EFFECTIVE DATE AND TRANSITION
10.1 Effective
date
An entity applies IFRS 16 for annual periods beginning on or after 1 January 2019. Earlier
application is permitted for entities that apply IFRS 15 at or before the date of initial
application of IFRS 16. If an entity applies IFRS 16 earlier, it must disclose that fact.
[IFRS 16.C1].
The application date for IFRS 15 is for annual periods beginning on or after
1 January 2018.
10.2 Transition
The transition provisions of IFRS 16 are applied at the initial date of application. For
this purpose, the date of initial application is the beginning of the annual reporting
period in which an entity first applies IFRS 16. [IFRS 16.C2].
As a practical expedient, an entity is not required to reassess whether a contract is, or
contains a lease at the date of initial application. Instead, an entity is permitted:
(a) to apply IFRS 16 to contracts that were previously identified as leases applying
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