A company transfers legal title of a warehouse to a bank and simultaneously leases the same warehouse back for use over the next 15 years. Applying IFRS 15's control-transfer criteria, the company determines that the bank has not obtained control of the warehouse — for example, the company retains an option to repurchase the warehouse at a price expected to be below its fair value at the option date. Under IFRS 16, how should the company (seller-lessee) and the bank (buyer-lessor) account for the proceeds exchanged?
- The company derecognizes the warehouse and recognizes a right-of-use asset for the leaseback, exactly as it would if the transfer had qualified as a sale under IFRS 15
- Because the transfer does not satisfy IFRS 15's requirements to be accounted for as a sale, the company continues to recognize the warehouse and instead recognizes a financial liability equal to the proceeds received, while the bank recognizes a financial asset for the same amount
- The company recognizes a gain or loss immediately for the full difference between the warehouse's carrying amount and the proceeds received, because IFRS 16 requires immediate gain or loss recognition on every sale-and-leaseback transaction
- The transaction falls entirely outside the scope of IFRS 16 and should instead be accounted for solely under IAS 16 as a revaluation of property, plant and equipment
Why B? And why not the others?
Correct answer: B. Because the transfer does not satisfy IFRS 15's requirements to be accounted for as a sale, the company continues to recognize the warehouse and instead recognizes a financial liability equal to the proceeds received, while the bank recognizes a financial asset for the same amount
IFRS 16 paragraphs 99-103 require an entity to first apply IFRS 15's requirements to determine whether the transfer of an asset in a sale-and-leaseback transaction is a sale. When it is not — as here, because the repurchase option indicates the bank has not obtained control of the warehouse — the seller-lessee continues to recognize the transferred asset and instead recognizes a financial liability equal to the proceeds received, accounted for applying IFRS 9; the buyer-lessor recognizes a financial asset for the same amount rather than the underlying property. The option describing derecognition and a right-of-use asset is wrong because that treatment applies only when the transfer does qualify as a sale under IFRS 15, which is not the case in this scenario. The option requiring immediate recognition of the full gain or loss is wrong because that outcome is not a general rule for every sale-and-leaseback transaction — even when a transfer does qualify as a sale, gain or loss is limited to the portion of the asset's rights transferred to the buyer-lessor rather than recognized in full, and here no sale has occurred at all, so no such gain or loss arises. The option placing the transaction outside IFRS 16's scope is wrong because sale-and-leaseback transactions, including those that fail the IFRS 15 sale test, are explicitly addressed within IFRS 16 itself rather than being left to IAS 16's revaluation model.
Source: IFRS 16 Leases, paragraphs 99-103 (sale and leaseback transactions)