IFRS 16 AMENDMENT- SALE AND LEASEBACK TRANSACTION

International Accounting Standard Board (IASB) issued amendments concerning requirements for sale and leaseback transactions in IFRS 16. It explains how a seller-lessee accounts for a sale and leaseback after the date of the transaction.

The amendment applies to annual reporting periods beginning on or after 1 January 2024 and can be applied earlier. The amendments will not change the accounting for leases other than those arising in a sale and leaseback transaction.

When originally issued, IFRS 16 included no specific measurement requirements for sale and leaseback transactions. It was not always clear how to measure the liability arising from a leaseback, especially where the payments for the lease include payments that do not meet the definition of ‘lease payments.’

The amendment addresses how a seller-lessee should measure the right-of-use asset arising from a leaseback with variable lease payments (Not fixed payment).

A sale and leaseback is a transaction for which a company transfers or sells an asset and leases that same asset back for a period of time from the new owner. The seller(lessee) must assess whether the transaction is a sale as per the requirements of IFRS 15 (Revenue from contracts with customers) in order to recognize gain or loss.

If the transfer of the asset is accounted for as a sale, IFRS 16 requires the seller-lessee to recognize the leaseback by recognizing a lease liability, reflecting the payment terms of the leaseback and a right-of- use asset for the right of use retained. The seller- lessee recognizes only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor.

If accounted for as a sale, the seller measures the right-of-use asset arising from leaseback as the proportion of the previous carrying amount of the asset relating to the right of use retained. The gain (or loss) that the seller- lessee recognizes is limited to the proportion of the total gain (or loss) that relates to the rights transferred to the buyer-lessor.
The initial measurement of the lease liability that arises from a sale and leaseback transaction is a consequence of how the seller-lessee measures the right-of-use asset and the gain or loss recognized at the date of the transaction. The seller is required to measure lease liability arising from the leaseback in a way that does not recognize any amount of the gain or loss that relates to the right of use it retains.

Entities that enter into sale and leaseback transactions with variable payments may have a significant change in accounting policy with the amendment.

This is in accordance with IAS 8 (Accounting Policies, Changes in Accounting Estimates and Error) which requires compliance with specific IFRS applying to a transaction and provides guidance on developing accounting policies for other items that result in relevant and reliable information