Accounting Effects of Leaseback Operations under IFRS for SMEs
Leaseback Operation
A leaseback operation is a contractual transaction in which the owner of an asset decides to sell it so that the buyer, acting as the lessor, leases back the use of the same asset.
Accounting Recognition of the Leaseback (paragraph 20.32 IFRS for SMEs)
“A sale and leaseback is a transaction that involves the sale of an asset and the subsequent leasing of that asset back to the seller...”
If it is a finance lease, the seller must defer the excess over the carrying amount and amortize it over the lease term.
Effects of the Operation
- Loss on sale: recognize immediately in profit or loss.
- Gain: record as deferred income and amortize over the lease term.
Accounting Example
| Account | Debit | Credit |
|---|---|---|
| Property, plant and equipment | 10,000 | |
| Accumulated depreciation | 1,000 | |
| Banks | 8,000 | |
| Loss on disposal of fixed assets | 1,000 | |
| Total | 10,000 | 10,000 |
Accounting Recognition according to paragraph 23.8 IFRS for SMEs
“An entity shall apply recognition criteria to two or more transactions together when they are linked...”
Recognition of the Finance Lease
“20.9 At the commencement of the finance lease term, a lessee shall recognize its rights of use and obligations...”
Amortization Table
| Year | Debt | Interest | Principal repayment | Installment | Balance |
|---|---|---|---|---|---|
| 1 | 120,000,000 | 11,556,000 | 18,444,000 | 30,000,000 | 101,556,000 |
| 2 | 101,556,000 | 9,779,843 | 20,220,157 | 30,000,000 | 81,335,843 |
| 3 | 81,335,843 | 7,832,642 | 22,167,358 | 30,000,000 | 59,168,484 |
| 4 | 59,168,484 | 5,697,970 | 24,302,030 | 30,000,000 | 34,866,455 |
| 5 | 34,866,455 | 3,358,546 | 26,641,454 | 30,000,000 | 8,225,000 |
| Purchase | 8,225,000 | 8,225,000 | 8,225,000 | 0 | |
| Total | 38,225,000 | 158,225,000 |
Initial Accounting Entry (January 1, 2020)
| Detail | Debit | Credit |
|---|---|---|
| Leasing – Property, plant and equipment | 120,000,000 | |
| Financial liabilities | 120,000,000 |
Subsequent Measurement and Payment of First Installment (Year-end 2020)
| Detail | Debit | Credit |
|---|---|---|
| Interest expense | 11,556,000 | |
| Financial liabilities | 18,444,000 | |
| Banks | 30,000,000 |
Conclusion
The leaseback can be recorded by derecognizing the asset and recognizing the loss, or treated as a single transaction (section 23.8) without derecognition, recognizing only the financing.
