Tentative IFRS IC decision on a sale and leaseback

The Committee received a request about the applicability of IFRS 16 requirements to a transaction in which an entity sells its equity interest in a subsidiary that holds a single asset and then leases that asset back.

Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 16

24 November 2020

The fact pattern described in the request is as follows:

  • the wholly-owned subsidiary holds only one asset, a building, and has no liabilities;
  • the building the subsidiary holds does not meet the definition of a business (as defined in IFRS 3);
  • the sale of the subsidiary relates to all the equity interest and results in the loss of control;
  • the lease is concluded at a market rate;
  • the transfer of the building satisfies the requirements in IFRS 15 to be accounted for as a sale of the building;
  • the sale price equals the fair value of the building at the transaction date.

At stake is whether the entity should apply the sale and leaseback requirements in IFRS 16.

During its September meeting, the IFRS IC examined this question and tentatively concluded:

  • that the entity loses control of the subsidiary and therefore applies paragraphs 25 and B97-B99 of IFRS 10 to account for the loss of control of the subsidiary;
  • that the transfer of the building to the third party (through the sale of its equity interest in the subsidiary) satisfies the requirements in IFRS 15 to be accounted for as a sale of the building. Therefore, the sale and leaseback requirements in IFRS 16 paragraph 100(a) apply. The entity therefore measures the right-of-use asset at the proportion of the previous carrying amount of the building in which it retains a right of use, and recognises only the amount of any gain that relates to the rights transferred to the third party.

Accordingly, the IFRS IC considers that the transfer of the building via the sale of the equity interest in the subsidiary is no obstacle to the application of the provisions of the sale and leaseback requirements of IFRS 16. The Committee tentatively decided not to add this matter to its work plan.

This tentative decision was published in the September IFRIC Update.

It is open to comments until 23 November 2020.