What is Sale and Leaseback?
A sale and leaseback (SLB) transaction is a two-step process:
- Sale: Company A sells an asset (e.g., a building worth £10m) to a buyer (e.g., a bank, pension fund, or investor)
- Leaseback: Company A immediately leases the same asset back from the buyer for a defined term
Result: Company A gets cash upfront, but continues using the asset and makes lease payments. The buyer becomes the owner and lessor.
Real-world example: A retail chain owns a flagship store building (£50m value). It sells the building to a property company and immediately leases it back for 20 years at £3m/year. The retailer gets £50m in cash for expansion; the property company gets 20 years of rental income.
Seller-Lessee Accounting (The Company Using the Asset)
The Key Principle
Under IFRS 16, if the leaseback is classified as a lease, you account for it as you would any other lease: recognize a right-of-use (ROU) asset and lease liability. However, you must also defer any gain on the sale.
Step 1: Assess Whether the Sale is a "True Sale"
IFRS 15 (Revenue) requires that the transfer of the asset be a "performance obligation" and that you have no ongoing control. For SLB transactions, the question is: did you really transfer the asset, or is this just a secured borrowing?
If the leaseback is a finance lease (the buyer has retained risks), the "sale" might not qualify for revenue recognition, and you keep the asset on the balance sheet.
If the leaseback is an operating lease (the buyer has transferred most risks), the sale is "true" and you derecognize the asset.
Step 2: Recognize the Lease Liability and ROU Asset
You recognize the lease liability and ROU asset just as you would with any leaseback. Calculate the PV of lease payments using your IBR.
Step 3: Defer the Gain
Any gain on the sale of the asset is NOT recognized immediately in P&L. Instead, you defer it and recognize it over the lease term (typically straight-line).
Audit trap: Many companies recognize the sale gain immediately, forgetting that IFRS 16.100 requires deferral. Auditors will challenge this.
Journal Entries for Seller-Lessee
Step A: Record the Sale (simplified)
Cr Asset (building, equipment) [book value]
Cr Deferred Gain — SLB [gain: proceeds −’ book value]
Step B: Recognize Lease Liability and ROU Asset
Cr Lease Liability [PV of lease payments]
Step C: Recognize Deferred Gain (Straight-Line Over Lease Term)
Cr Gain on SLB — P&L [annual gain / lease term]
Buyer-Lessor Accounting (The Entity Purchasing and Leasing Out)
The Key Principle
From the buyer's perspective, this is a simple lease transaction. The buyer is the lessor. Account for the lease as an operating or finance lease under IFRS 16 (lessor accounting), depending on the terms.
Classification
- Finance lease: If the risks/rewards transfer to the seller-lessee (typical for long-term SLBs)
- Operating lease: If the buyer retains significant risks (less common for SLBs)
Journal Entries for Buyer-Lessor (Finance Lease)
Step A: Record the Purchase
Cr Cash [purchase price]
Step B: Recognize Net Investment in Finance Lease
Cr Property, Plant & Equipment [amount]
Note: The buyer-lessor derecognizes the asset from its PP&E and recognizes a "net investment in lease" (finance lease receivable). Interest income is recognized as payments are received.
Gain/Loss Recognition: The Full Picture
| Scenario | Seller-Lessee Treatment | Impact on P&L |
|---|---|---|
| Sale price > Book value (gain) | Defer entire gain; recognize ratably over lease term | Gain recognized over lease term, not at sale date |
| Sale price < Book value (loss) | Recognize loss immediately in P&L | Loss hit in year of sale |
| Sale price = Fair value of asset being sold | SLB is at arm's length; standard gain deferral applies | Normal treatment |
| Sale price > Fair value (inflated price) | Only defer the fair-value gain; excess is interest or other income | Gain split: defer FV gain, recognize excess separately |
Worked Example: Building Sale and Leaseback
Scenario
Seller-Lessee (Retail Chain):
- Book value of building: £8m (no accumulated depreciation for simplicity)
- Sale price: £10m (gain of £2m)
- Leaseback term: 20 years
- Annual lease payment: £600k (paid at year-end)
- IBR: 4.5%
Step 1: Calculate Lease Liability
PV of £600k annual payments over 20 years at 4.5% ‰ˆ £9.13m
Step 2: Journal Entries (Seller-Lessee)
Entry 1: Record the Sale
Cr Building (PP&E) 8,000,000
Cr Deferred Gain — SLB 2,000,000
Entry 2: Recognize Lease Liability and ROU Asset
Cr Lease Liability 9,130,000
Entry 3: Annual Deferred Gain Recognition (Year 1)
Annual amount: £2,000,000 ÷ 20 years = £100,000/year
Cr Gain on SLB — P&L 100,000
Common Traps and Auditor Red Flags
Trap 1: Recognizing the Entire Gain at Sale Date
❌ Wrong: Record £2m gain immediately in P&L when the asset is sold
✓ Correct: Defer £2m and recognize £100k/year over the 20-year lease term
Trap 2: Underestimating the ROU Asset
❌ Wrong: ROU asset = sale price −’ lease liability (£10m −’ £9.13m = £0.87m)
✓ Correct: ROU asset = PV of lease payments = £9.13m (same as liability at inception)
Trap 3: Forgetting About Operating Lease Leasebacks
If the leaseback is an operating lease (not a finance lease), the seller-lessee does NOT recognize an ROU asset/liability. Instead, they rent the asset as before. The deferred gain treatment still applies.
What Auditors Focus On
1. Is the Sale "Real"?
Auditors ask: "Did you genuinely transfer risks and rewards?" If it's merely collateralized borrowing disguised as a sale, the sale should not be recorded.
2. Is the Gain Deferred?
Auditors recalculate the gain and verify it's being recognized straight-line over the lease term, not at the sale date.
3. Is the Lease Correctly Classified?
Auditors assess whether the leaseback is a finance or operating lease, and verify it's accounted for accordingly.
FAQs
If I recognize a loss on the sale, do I defer it?
No. Losses are recognized immediately in P&L. Only gains are deferred.
What if the sale price is below fair value?
If you sell below fair value, only defer the gain up to fair value. The excess below fair value is recognized immediately (it's an economic loss, not deferred).
Is the ROU asset the same as the deferred gain?
No. The ROU asset is the PV of lease payments. The deferred gain is the difference between sale price and book value. They're separate items.
Real-Life Case Study: Sale and Leaseback of a Head Office
Scenario. A company sells its head office for £10m (fair value £10m; carrying amount £6m) and leases it back for 15 years.
Treatment. Because the transfer qualifies as a sale under IFRS 15, the seller-lessee recognises a right-of-use asset as the proportion of the previous carrying amount it retains, and only the gain relating to the rights transferred to the buyer. Of the £4m total gain, only the portion relating to rights transferred (say £2.6m) is recognised now; the rest is effectively deferred within the ROU asset.
Takeaway. You cannot book the full £4m profit just because cash came in. IFRS 16 deliberately limits day-one gains on sale-and-leasebacks, because the seller has not really disposed of the asset, it has kept the right to use it.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
• IFRS 16 Discount Rate (IBR): Complete Guide to Incremental Borrowing Rate Calculation
• IFRS 16 Lease Modifications: Every Scenario Explained with Journal Entries
• IFRS 16 Journal Entries: Complete Step-by-Step Templates & Examples
• IFRS 16 Short-Term & Low-Value Leases: Recognition Exemptions Explained with Examples