The IASB has issued narrow-scope amendments to requirements for sale and leaseback transactions in IFRS 16 explaining how an entity accounts for a sale and leaseback after the date of the transaction. Sale and leaseback transactions where some or all the lease payments are variable lease payments that do not depend on an index or rate are most likely to be impacted.
What is the issue?
In June 2020, the IFRS Interpretations Committee issued an agenda decision addressing how a seller-lessee should measure the right-of-use asset arising from the leaseback and, as a result, how it should determine the gain or loss on a sale and leaseback transaction where the transaction qualifies as a ‘sale’ under IFRS 15 and the lease payments include variable lease payments that do not depend on an index or rate. While the agenda decision provided an approach for the initial measurement of the right-of-use asset and the lease liability arising from the leaseback, it did not address how the lease liability would be subsequently measured.
The amendments to IFRS 16, issued in September 2022, aim to address that gap. IFRS 16 now specifies that, in subsequently measuring the lease liability, the seller-lessee determines ‘lease payments’ and ‘revised lease payments’ in a way that does not result in the seller-lessee recognising any amount of the gain or loss that relates to the right of use it retains.
In other words, without these amendments, a seller-lessee, applying the subsequent measurement requirements for lease liabilities unrelated to a sale and leaseback transaction, might have recognised a gain on the right of use it retains solely because of a remeasurement (for example, following a lease modification or change in the lease term), even though no transaction or event would have occurred to give rise to that gain.
Any gains and losses relating to the full or partial termination of a lease continue to be recognised when they occur as these relate to the right of use terminated and not the right of use retained.
The amendments do not prescribe a particular method of subsequent measurement. However, they include examples illustrating the initial and subsequent measurement of the lease liability where there are variable payments that do not depend on an index or rate.
What is the impact and for whom?
Any entity that has entered into, or might enter into, a sale and leaseback transaction for which the lease payments include variable payments that do not depend on an index or a rate could be impacted by these amendments.
When does it apply?
The amendments are effective for annual reporting periods beginning on or after 1 January 2024, but they could be early adopted.
What are the transition requirements?
An entity applies the requirements retrospectively back to sale and leaseback transactions that were entered into after the date when the entity initially applied IFRS 16. For example, an entity that applied IFRS 16 from 1 January 2019 (as many IFRS reporters did) would apply the amendments to sale and leaseback transactions that were entered into after 1 January 2019. This might require retrospective application to comparative periods as a result.
