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Calculate a Sale-and-Leaseback Gain — IFRS 16 Worked Example | CALC SERIES #13

IFRS 16 paragraph 99 requires the seller-lessee to recognise only the gain on rights transferred, not the full disposal gain. Here's the full proportional gain calculation — rights retained, rights transferred, ROU asset, lease liability — with the journal entry and balance check.

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Calculate a Sale-and-Leaseback Gain — IFRS 16 Worked Example | CALC SERIES #13

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In this video

  1. 0:00 Introduction — why the full gain isn't recognised in a sale-and-leaseback
  2. 0:20 The scenario — sell at FV €1,200k, CA €800k, PV leaseback €400k
  3. 0:55 IFRS 16 para 99 — proportional gain: rights retained vs rights transferred
  4. 1:22 Rights retained: €400k / €1,200k = 33.3%
  5. 1:48 Rights transferred: 66.7% — recognised gain €266,667
  6. 2:15 ROU asset: €800k CA × 33.3% = €266,667
  7. 2:45 Lease liability: PV of leaseback = €400,000
  8. 3:10 Full journal entry — 5 lines, balance check
  9. 3:40 Common mistake — recognising full €400k gain in P&L
  10. 4:05 Recap — proportional gain formula

Key terms in plain English

Sale and leaseback
A transaction where an entity sells an asset to another party and then leases the same asset back. IFRS 16 paragraph 98 requires the entity to first assess whether the transfer qualifies as a sale under IFRS 15.
Rights transferred
The proportion of the asset's economic benefits permanently transferred to the buyer-lessor. Under IFRS 16 para 99, only the gain attributable to these rights is recognised in profit or loss.
Rights retained
The proportion of the asset's economic benefits retained by the seller-lessee through the leaseback. Measured as PV of leaseback payments divided by FV of the asset. No gain is recognised on this portion.
Right-of-use asset
The seller-lessee's right to use the asset during the leaseback term, recognised at the proportion of the previous carrying amount relating to the rights retained.

Full explanation

Why IFRS 16 limits the sale-and-leaseback gain

A straightforward asset disposal recognises the full gain: proceeds minus carrying amount. A sale-and-leaseback is different because the seller retains access to the asset through the leaseback. If you sell a building and immediately lease it back for its entire remaining useful life, you haven't economically transferred anything — you're still in occupation. IFRS 16 paragraph 99 captures this intuition: only the gain on rights actually transferred to the buyer-lessor is recognised. The proportion retained through the leaseback stays embedded in the right-of-use asset.

The scenario: sell at fair value €1,200,000, carrying amount €800,000

Full gain before restriction: €1,200,000 minus €800,000 = €400,000. PV of leaseback payments: €400,000. Rights retained ratio: €400,000 / €1,200,000 = 33.3%. Rights transferred: 66.7%. Recognised gain: €400,000 × 66.7% = €266,667. ROU asset: €800,000 × 33.3% = €266,667. Lease liability: €400,000.

Journal entry with balance check

Dr Cash €1,200,000
Cr Building (derecognise carrying amount) €800,000
Cr Gain on disposal (P&L) €266,667
Dr Right-of-use asset €266,667
Cr Lease liability €400,000

Check: Debits = €1,200,000 + €266,667 = €1,466,667. Credits = €800,000 + €266,667 + €400,000 = €1,466,667. Balanced.

What happens to the deferred portion

The unrealised €133,333 (the retained 33.3%) is not deferred income on the balance sheet — it is embedded in the lower ROU asset. If the full gain of €400,000 had been recognised and a deferred income liability of €133,333 created, the economic effect would be the same, but IFRS 16 does not use that presentation. The gain simply goes partly to profit or loss and partly reduces the ROU asset below what it would otherwise be.

Common mistake: recognising the full €400,000

The journal Dr Cash €1,200,000 / Cr Building €800,000 / Cr Gain €400,000 / Dr ROU €400,000 / Cr Lease liability €400,000 overstates P&L by €133,333 and overstates the ROU asset by the same amount. Over the leaseback term, depreciation on the higher ROU asset would be higher than warranted — but the initial P&L inflation is the more visible error at exam level.