Sale and leaseback: recognise the gain on rights sold, not the whole uplift
A machine with a £600,000 carrying amount sells for its £1m fair value and is leased back. The £400,000 uplift is not automatically the recognised gain. If the retained use represents 40% of the asset's value on the stated market terms, the seller-lessee recognises a £240,000 right-of-use asset and a £240,000 gain on the rights transferred.
Establish that the transfer is a sale
IFRS 16 paragraphs 98 to 103 require the seller-lessee to apply IFRS 15 when deciding whether the asset transfer is a sale. Cash received and legal title transferred do not, by themselves, settle the transfer-of-control assessment. Repurchase rights and other terms can change the conclusion.
This guide uses UK-adopted full IFRS seller-lessee accounting for a 2026 annual period, without early adoption of IFRS 18. It assumes a documented sale conclusion, sale price equal to fair value, and fixed market leaseback terms. It does not calculate a tax gain or apply government budgeting rules.
For a qualifying sale, paragraph 100 measures the retained right-of-use asset at the proportion of the previous carrying amount relating to the use retained. The seller-lessee recognises only the gain or loss relating to rights transferred to the buyer-lessor.
That keeps the retained use on its share of the old carrying basis. Treating the leaseback as an ordinary new lease measured without that restriction would recognise gain on rights the seller still uses.
Split the retained and transferred rights
All amounts are hypothetical pounds. The owned machine has a supported net carrying amount of £600,000 and fair value of £1,000,000. It sells for £1,000,000 cash. The control assessment concludes that the transfer is a sale, with no repurchase arrangement or other term defeating that conclusion.
Fixed market leaseback payments have a present value of £400,000 at a supported 5% rate. One consistent schedule is five annual payments in arrears of £92,389.919251, using the unrounded amount in calculations. There are no variable payments, off-market terms, incentives, prepayments, costs, restoration adjustments, impairment, tax entries or option complications.
For these fixed market terms, the retained-use proportion is £400,000 / £1,000,000 = 40%. Apply that proportion to the old £600,000 carrying amount to recognise a £240,000 right-of-use asset. The other 60% represents rights transferred.
The total uplift is £1,000,000 − £600,000 = £400,000. The recognised gain is 60% of that uplift, or £240,000. The £160,000 uplift relating to retained use is excluded from the gain.
| Measurement | Calculation | Result |
|---|---|---|
| Retained-use proportion | £400,000 / £1,000,000 | 40% |
| Right-of-use asset | £600,000 × 40% | £240,000 |
| Gain relating to retained use, excluded | £400,000 × 40% | £160,000 |
| Gain on rights transferred | £400,000 × 60% | £240,000 |
Sources and context, checked :
Post the transaction and reconcile both sides
Record Dr cash £1,000,000; Dr right-of-use asset £240,000; Cr underlying machine net carrying amount £600,000; Cr lease liability £400,000; Cr gain £240,000. Debits and credits each total £1,240,000. In the asset register, remove original gross cost and accumulated depreciation so the net amount removed is £600,000.
Do not debit a £400,000 right-of-use asset and recognise the entire £400,000 uplift as gain. That would disregard the retained-right carrying-basis requirement in this transaction.
Assuming straight-line consumption over the five-year leaseback, a useful life covering that period, nil residual and no ownership transfer or purchase option, annual right-of-use depreciation is £48,000. First-year interest is £20,000. The first payment leaves a £327,610.08 liability, using the unrounded payment.
IFRS 16 paragraph 102A also constrains subsequent measurement so it does not recognise gain or loss relating to retained use. The related amendment has applied to annual periods beginning on or after 1 January 2024. This fixed-payment example does not resolve every variable-payment case addressed by that requirement.
Keep failed sales and off-market terms separate
If the same £1,000,000 cash transfer fails the IFRS 15 sale assessment, paragraph 103 produces a different result. Keep the original £600,000 owned asset and record Dr cash £1,000,000; Cr financial liability £1,000,000. Do not recognise a sale gain or a new leaseback right-of-use asset for that failed sale. Apply IFRS 9 to the financing and continue the applicable accounting for the owned asset.
Off-market terms also change the calculation. IFRS 16 treats below-market terms as prepaid lease payments and above-market terms as additional financing, using its prescribed comparison basis. The market-price and market-rent assumptions therefore need evidence.
Before posting, retain the sale-control conclusion, old carrying amount, fair-value and market-rent support, and leaseback present-value schedule. Reconcile the gain to the rights transferred and the new asset to the old carrying amount retained. A cash receipt is the beginning of that analysis, not the conclusion.