Regulatory updates

A sale and leaseback is a transaction for which a company sells an asset and leases that same asset back for a period of time from the new owner. Currently, IFRS 16, Leases includes requirements on how to account for a sale and leaseback at the date the transaction takes place. However, IFRS 16 did not specify how a company accounts for a sale and leaseback after the date of the transaction. In this regard, the International Accounting Standards Board (IASB), in November 2020 had released an Exposure Draft (ED), Lease Liability in a Sale and Leaseback (Proposed amendment to IFRS 16) .

Consequently, on 22 September 2022, IASB issued final set of amendments to IFRS 16 (Lease liability in a Sale and Leaseback) (amendments), which add to the requirements explaining how a company accounts for a sale and leaseback after the date of the transaction. The amendments would not change the accounting for leases other than those arising in a sale and leaseback transaction.

Currently, as per IFRS 16, a seller should measure the right-ofuse asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right-ofuse retained by the seller-lessee. However, IFRS 16 did not prescribe how a liability arising in a sale and leaseback transaction should be measured.

The amendments have now confirmed the following:

• On initial recognition: On initial recognition, the sellerlessee includes variable lease payments when it measures a lease liability arising from a sale-and-leaseback transaction
• After initial recognition: After initial recognition, the sellerlessee applies the general requirements for subsequent accounting of the lease liability such that it does not recognise any gain or loss relating to the right-of-use it retains.

A seller-lessee may adopt different approaches that satisfy the new requirements on subsequent measurement.

Effective date: The amendments are effective for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted.

A seller-lessee would be required to apply the amendments retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to sale and leaseback transactions entered into after the date of initial application

To access the IFRS project page which discusses the amendment, please click here