Lease liability in a sale-and-leaseback

The amendments to IFRS 16 Leases introduce important changes affecting how seller-lessees account for variable lease payments in sale-and-leaseback transactions. Here’s a detailed look at the key aspects:

1. New Accounting Model for Variable Payments

The amendments specify how to account for variable lease payments arising from sale-and-leaseback transactions. Previously, IFRS 16 required the recognition of sale proceeds and the leaseback as separate transactions. The new model introduces a more nuanced approach to handling variable payments:

• Variable Payments Based on an Index or Rate: These payments are initially recognized as part of the lease liability. If these payments are subsequently remeasured, adjustments are made to the lease liability.

• Variable Payments Not Based on an Index or Rate: These are not included in the initial measurement of the lease liability. Instead, they are recognized as an expense in the period in which they occur.

2. Impact on Sale-and-Leaseback Transactions

For sale-and-leaseback transactions entered into since January 1, 2019, the amendments require seller-lessees to reassess and potentially restate the transactions. Specifically:

• Reassessment Required: Seller-lessees need to reassess their sale-and-leaseback transactions to determine whether the variable lease payments should be included in the lease liability.

• Potential Restatement: If the initial accounting treatment does not align with the new requirements, restatement might be necessary. This could involve adjusting the amounts recognized for the sale proceeds and the corresponding lease liability.

3. Practical Implications

• Restatement of Financial Statements: Entities might need to update their financial statements to reflect the new accounting treatment. This involves re-evaluating previously recorded sale-and-leaseback transactions and making adjustments where necessary.

• Increased Complexity: The new model introduces additional complexity in accounting for variable lease payments. Entities will need to enhance their systems and processes to manage and track these payments accurately.

• Disclosure Requirements: The amendments may also impact the disclosure requirements, as entities will need to provide more detailed information about their lease liabilities and variable lease payments.

Overall, these changes aim to improve the accuracy and transparency of accounting for variable lease payments in sale-and-leaseback transactions, aligning the accounting treatment more closely with the economic substance of the transactions.