Key Points
- The seller-lessee recognises only the portion of any gain that relates to the rights transferred to the buyer-lessor, not the full sale price.
- If the transfer does not qualify as a sale under IFRS 15 , both parties treat the arrangement as a financing transaction.
- At firms like ours, these transactions come up most on property-heavy clients where real estate sits at 40%–60% of total assets and the entity needs to release capital.
- Misstating the gain calculation is the single most frequent inspection finding on these transactions.
What goes wrong on these files
A client sells a warehouse for €3.6M, leases it back the same day, and the preparer books the full €1.2M gain to P&L. The file lands on your desk with a single journal entry and no supporting calculation. This is the finding that generates the most review notes on sale-and-leaseback engagements, and it happens because the gain restriction in IFRS 16.100 (a) is easy to overlook when the transaction looks like a straightforward disposal.
IFRS 16.98 requires both parties to apply IFRS 15 to determine whether the transfer of the asset constitutes a sale. If the buyer-lessor obtains control of the asset under IFRS 15 's performance obligation criteria, the transaction is a sale. If not, the entire arrangement is accounted for as a financing: the seller-lessee keeps the asset on its balance sheet and records a financial liability for the proceeds received.
When the transfer does qualify as a sale, the seller-lessee derecognises the asset and recognises a right-of-use asset (ROU asset) representing its retained right of access. The gain on disposal is not the full difference between sale price and carrying amount. IFRS 16.100 (a) restricts the recognised gain to the proportion of the previous carrying amount that relates to the rights transferred to the buyer-lessor. The portion relating to the retained right of use stays off the income statement entirely.
The buyer-lessor accounts for the purchase under IAS 16 or IAS 40 and for the lease under IFRS 16 's lessor classification rules. ISA 540.13 (a) requires the auditor to evaluate whether the entity's method for measuring the ROU asset and calculating the restricted gain is appropriate. The split demands a fair value allocation that involves judgment, and the file should tell a story that connects the valuation report to the journal entry without gaps.
Worked example
Client: Dutch construction company, FY2025, revenue €55M, Dutch GAAP (RJ) reporter transitioning to IFRS. Martens owns a logistics warehouse in Rotterdam with a carrying amount of €2,400,000. On 1 July 2025, Martens sells the warehouse to Rijnmond Vastgoed B.V. for €3,600,000 (fair value confirmed by an independent valuation) and simultaneously enters a ten-year leaseback at annual payments of €290,000. Martens cannot readily determine the rate implicit in the lease and uses its incremental borrowing rate of 4.8%.
Step 1: assess whether the transfer is a sale
Rijnmond obtains legal title, physical possession, the significant risks and rewards of ownership, and an unconditional right to direct the asset's use. Martens has no repurchase option. Under IFRS 15.38 , control transfers to the buyer. The transaction qualifies as a sale.
Documentation note: record the IFRS 15 control assessment, citing the absence of repurchase rights and the transfer of legal title. Cross-reference the sale agreement dated 1 July 2025.
Step 2: measure the lease liability
The present value of ten annual payments of €290,000 discounted at 4.8% is €2,234,188.
Documentation note: record the discount rate source (bank confirmation for a secured ten-year facility) and the payment schedule. Attach the present value calculation per IFRS 16.26 .
Step 3: measure the ROU asset
The ROU asset equals the proportion of the previous carrying amount that relates to the right retained. The ratio is the present value of lease payments (€2,234,188) divided by the fair value of the asset (€3,600,000), giving 62.1%. The ROU asset is €2,400,000 multiplied by 62.1%, producing €1,490,400.
Documentation note: record the proportional allocation under IFRS 16.100 (a). Show the ratio calculation and cross-reference to the independent valuation report supporting the €3,600,000 fair value.
Step 4: calculate the gain on sale
The total gain before restriction is €3,600,000 minus €2,400,000, equalling €1,200,000. Only the portion relating to the rights transferred is recognised. The rights transferred represent 37.9% of the asset (100% minus 62.1%). The recognised gain is €1,200,000 multiplied by 37.9%, producing €454,800. The remaining €745,200 is not recognised in profit or loss.
Documentation note: record the gain calculation showing both the restricted and unrestricted portions. Reference IFRS 16.100 (a) and attach the journal entry (Dr: Cash €3,600,000 / Cr: Warehouse €2,400,000 / Cr: Gain on disposal €454,800 / Dr: ROU asset €1,490,400 / Cr: Lease liability €2,234,188 / balancing entry for difference of €689,588 adjusting the ROU asset). Reconcile to the TB.
The restricted gain of €454,800 and ROU asset of €1,490,400 are defensible because the fair value is independently confirmed and the proportional allocation follows IFRS 16.100 (a) without deviation.
Why it matters in practice
We've seen teams recognise the full gain on the sale (€1,200,000 in the example above) rather than restricting it to the proportion relating to rights transferred. IFRS 16.100 (a) is explicit: only the gain attributable to the transferred rights enters profit or loss. Failure to apply the proportional restriction overstates both profit and equity.
The IFRS 15 sale assessment gets treated as a tick-box exercise on about half the files we've reviewed. That's a problem. When the leaseback includes a repurchase option or the sale price sits significantly above fair value, IFRS 16.101 requires the transaction to be treated as a financing rather than a sale. ISA 240.32 directs the auditor to evaluate whether unusual terms (above-market pricing or embedded options) indicate that the substance differs from the form.
Sale and leaseback vs. secured borrowing
| Dimension | Sale and leaseback ( IFRS 16.98 –103) | Secured borrowing |
|---|---|---|
| Asset on balance sheet | Derecognised by seller-lessee; ROU asset recognised instead | Remains on the borrower's balance sheet |
| Liability recognised | Lease liability (present value of lease payments) | Financial liability (loan principal plus interest) |
| Gain recognition | Restricted gain on the rights transferred to the buyer-lessor | No gain; proceeds are loan disbursement, not sale consideration |
| Control of asset | Transfers to the buyer-lessor under IFRS 15 | Stays with the borrower; lender holds security interest only |
| Key audit judgment | Whether control genuinely transfers or whether the arrangement is, in substance, a financing | Whether the asset pledged as collateral is appropriately disclosed |
The distinction matters because entities sometimes structure financings as sale-and-leaseback transactions to keep the original asset off-balance-sheet. If the IFRS 15 control criteria aren't met, the auditor reclassifies the entire arrangement as a secured borrowing. That eliminates the gain and changes the balance sheet presentation.
Related terms
Related tools
Related reading
Frequently asked questions
What happens if the sale price is above fair value in a sale and leaseback?
IFRS 16.101 treats the excess of the sale price over fair value as additional financing provided by the buyer-lessor. The seller-lessee records the excess as a financial liability rather than as part of the gain. The auditor tests this by comparing the sale price to the independent valuation and assessing whether any premium reflects an embedded loan.
Does a sale and leaseback affect lease classification for the buyer-lessor?
Yes. The buyer-lessor classifies the leaseback as either a finance lease or an operating lease under IFRS 16.61–66. The classification is independent of the sale-and-leaseback nature of the transaction. If the leaseback transfers substantially all risks and rewards back to the seller-lessee, the buyer-lessor recognises a finance lease receivable rather than the purchased asset.
How do I document the IFRS 15 sale assessment for a leaseback?
Record the five IFRS 15.38 control indicators against the specific transaction facts: legal title transferred, physical possession transferred, buyer has significant risks and rewards, buyer has accepted the asset, and seller has a present right to payment. IFRS 16.99 requires this assessment as a precondition to sale-and-leaseback accounting.