On 27 November 2020, the International Accounting Standards Board (IASB) published Exposure Draft ED/2020/4, entitled “Lease Liability in a Sale and Leaseback”, which aims to clarify how a seller-lessee should apply the requirements of IFRS 16 for subsequent measurement of leases arising from sale and leaseback transactions.
Keywords: Mazars, Thailand, IFRS, IFRS IC, IASB, IFRS 16, Lease
21 January 2021
This Exposure Draft follows an agenda decision from the IFRS Interpretations Committee (IFRS IC) on the accounting treatment of sale and leaseback transactions with variable payments, which was published in the June 2020 IFRIC Update. The IASB announced in May 2020 that it would publish an Exposure Draft on the topic.
The Board’s proposed amendments to IFRS 16 primarily focus on clarifying how paragraphs 36 to 38 of the standard should be applied to subsequent measurement of lease liabilities resulting from sale and leaseback transactions with variable payments.
More specifically, the Exposure Draft proposes that, in a sale and leaseback transaction, the seller-lessee should:
- determine the proportion of the transferred asset that relates to the retained right-of-use asset (i.e. the right of use that the seller-lessee retains through the lease) by comparing (a) the present value of expected payments for the lease (including those that are variable), and (b) the fair value of the transferred asset at the date of the transaction;
- recognise a lease liability at an amount corresponding to the present value of the expected lease payments (including any expected variable lease payments);
- subsequently measure the lease liability by reducing its carrying amount to reflect the expected lease payments – but without re-measuring it to reflect any change in future variable lease payments – and recognise any (positive or negative) difference between actual and expected lease payments in profit or loss.
As regards the transition requirements, the IASB proposes that the requirements should be applied retrospectively in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, unless this is not possible without the use of hindsight. If retrospective application is only possible with the use of hindsight, the seller-lessee shall determine the lease payments at the beginning of the period in which it first applies the amendment.
The IASB is also planning to add two new illustrative examples to IFRS 16. The Exposure Draft is available here, and the comment period is open until 29 March 2021.