How do you treat sale-leaseback transactions under IFRS 16?

Answer

Mechanics

Sale-leaseback (SLB) means the owner sells an asset, typically real estate, and immediately leases it back. It is a classic cash-generation transaction and is often used in PE contexts to repay debt after an LBO.

Key IFRS 16 question

Is it a sale under IFRS 15?

Sale test

Has control transferred to the buyer?
Is there no repurchase option that neutralizes sale accounting?
Have substantial risks and rewards transferred?

Deep diveShow more details

If it qualifies as a sale

Seller / lessee: PP&E is derecognized, cash comes in, a new RoU asset for the retained portion and a lease liability are recognized. Gain / loss is recognized only for the transferred portion, not the retained portion.
Buyer / lessor: Asset comes in, cash goes out, and lessor accounting usually follows the operating-lease model.

If it is not a sale

Treat it as financing. Cash comes in as debt, with no PP&E derecognition.

Example — plant building sale

Inputs:

Carrying value of building: $60m
Sale price to real-estate investor: $100m
Retained portion via 10-year leaseback / RoU: $80m

Calculation if sale qualifies:
```
Cash: +$100m
PP&E derecognized: -$60m
RoU + lease liability: +$80m (both sides, equity-neutral)
Gain recognized: $40 x ($100 - $80) / $100 = $8m
```

Total book gain = $100m - $60m = $40m. Only the transferred 20% is recognized, so 20% x $40m = $8m.

Pitch tip

SLBs are a classic PE value-creation lever. Selling plant real estate can generate $100-300m of cash for debt paydown, but the higher rent remains an operating burden in the valuation forecast.

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