As the name suggests, Sale and Leaseback transactions involve both sale and lease transactions at the same time. But as they relate to the same asset, this is the reason of calling this as Sale and Leaseback transaction collectively.
In this type of transaction, owner sells an asset to the other party. Then, the other party lease out the same asset to the original owner simultaneously. The advantages are enjoyed by both parties as original owner retains the asset and get lump sum amount. On the other hand, buyer of the asset enjoys ownership and periodic income.
Due to change in the recognition of revenue, there is a strong need to decide whether the transaction constitutes a sale as per International Financial Reporting Standard IFRS 15.
AS PER IFRS 16 – Accounting for sale and leaseback, transaction depends on revenue recognition accounting as described in IFRS 15.
If transaction constitutes a sales as per IFRS 15, the original seller or the lessee records this as the Right of use asset (ROU). This will be the proportionate carrying amount of the asset. Any gain or loss on Leaseback transaction shall be up to carrying amount actually transferred to the lessor.
For example, if the fair value of the asset is 22, Asset value 30, carrying value is 20 and present value of periodic payment to the lessor is 18, then following journal entry would be passed, in case this is an operating lease:
| Debit | Credit | |
| Right of use asset | 18 | |
| Lease Liability | 18 | |
| Cash | 22 | |
| Accumulated depreciation | 10 | |
| Asset | 30 | |
| Gain | 2 |
In case, if this is a finance lease, then It would not be a sale transaction. So, following entry will be passed:
| Debit | Credit | |
| Cash | 22 | |
| Notes Payable | 22 | |
| Depreciation expenses | 2 | |
| Accumulated Depreciation | 2 |