Sale-and-leaseback deals have long been a popular way for businesses to free up cash tied up in property or equipment while still keeping the use of that asset. But for years, one part of the accounting for these transactions had a gap that created real inconsistency across companies. Standard setters addressed this gap with a targeted amendment to IFRS 16, and if your business has done or is considering a sale-and-leaseback, understanding this change matters.
Why the Amendment Was Needed
Under the original version of IFRS 16, there was clear guidance on how to measure the right of use asset and lease liability at the moment a sale-and-leaseback transaction happens. What was missing was clear direction on how to measure that lease liability afterward, especially when some or all of the leaseback payments were variable and not tied to an index or a rate.
This gap became a real problem in practice. Without specific guidance, some businesses applying the standard’s normal remeasurement rules for lease liabilities ended up recognizing a gain on the portion of the asset they still had the right to use, even though nothing had actually happened to justify that gain. That outcome did not reflect the economic reality of the transaction.
What the Amendment Actually Changed
In September 2022, a narrow scope amendment was issued that added specific requirements for how a seller-lessee measures the lease liability after the transaction date. The amendment does not change how the transaction is measured on day one. The initial measurement of the right of use asset as a proportion of the previous carrying amount, and the inclusion of variable payments in the initial lease liability, stay the same as before.
What changes is the subsequent measurement approach. The amendment requires the seller-lessee to determine lease payments and any revised lease payments in a way that does not result in recognizing any gain or loss relating to the right of use it has retained. In plain terms, the business needs a consistent method for calculating leaseback payments that keeps the accounting focused on the retained right of use, rather than accidentally creating gains through the mechanics of remeasurement.
Sources:
IFRS Foundation – IASB issues narrow-scope amendments to requirements for sale and leaseback transactions
IFRS Foundation – Lease Liability in a Sale and Leaseback (Completed Project)
IFRS Foundation – IFRS 16 Leases (official standard overview)
Why This Matters for Businesses With Variable Leaseback Payments
This amendment is most relevant to businesses whose leaseback arrangements include variable payments not linked to an index or interest rate, such as payments tied to usage or another variable factor specific to the arrangement. If your leaseback payments are entirely fixed, or linked to a standard index, the practical impact is smaller.
But for businesses with more creative or performance linked leaseback structures, this amendment requires developing a clear accounting policy for how leaseback payments will be calculated at each measurement date, since the standard does not prescribe one single method.
Key Points to Keep in Mind
- The amendment is effective for annual reporting periods beginning on or after 1 January 2024, with early application permitted.
- It applies retrospectively to sale-and-leaseback transactions entered into after the date a business first applied IFRS 16, not just transactions entered into after the amendment’s effective date.
- It does not introduce new rules for the initial measurement of the right of use asset or lease liability at the transaction date.
- It does not prescribe a specific calculation method, meaning businesses must develop their own consistent approach and document the reasoning behind it.
- Gains or losses relating to a full or partial termination of the leaseback are still recognized normally, since these relate to the portion of the right of use that has ended, not the portion retained.
What This Means for Past Transactions
Because the amendment applies retrospectively, businesses that completed sale-and-leaseback transactions before the amendment was issued may need to revisit those calculations. If your business used a measurement approach that allowed a gain to be recognized on the retained right of use due to remeasurement, that treatment likely needs to be corrected under the amended requirements.
This retrospective element is worth flagging early with your auditors, particularly if your business has entered into several sale-and-leaseback transactions over the years, since reworking historical calculations can take considerable time.
Building a Defensible Measurement Policy
Since the amendment does not specify one single acceptable method, businesses need to think carefully about how they will approach this in practice. One common approach involves comparing the present value of expected lease payments, including variable ones, against the fair value of the asset at the transaction date, to determine the proportion of the right of use retained.
Whatever methodology is chosen, the key requirement is consistency. The same approach should be applied across similar transactions, and the reasoning behind the chosen method should be clearly documented, since this is exactly the kind of judgment area that draws attention during an audit.
Practical Steps for Finance Teams
Businesses that have entered into, or are planning, sale-and-leaseback transactions should review existing arrangements to identify any that include variable payments not linked to an index or rate. From there, it makes sense to work with technical accounting resources or advisors to build a documented measurement policy, and to communicate any resulting changes to relevant stakeholders, including lenders who may be tracking related financial ratios.
FAQs
1. When did the IFRS 16 sale-and-leaseback amendment take effect?
The amendment is effective for annual reporting periods beginning on or after 1 January 2024, although earlier application was permitted.
2. Does the amendment change how the initial sale-and-leaseback transaction is measured?
No. The initial measurement of the right of use asset and lease liability at the transaction date remains the same. The amendment specifically addresses how the lease liability is measured afterward.
3. Which businesses are most affected by this amendment?
Businesses with sale-and-leaseback arrangements that include variable lease payments not linked to an index or a rate are most affected, since they now need a documented, consistent method for measuring lease payments after the transaction date.
Final Thoughts
The 2022 amendment to IFRS 16 closes a gap that had created real inconsistency in how sale-and-leaseback transactions were accounted for after the initial transaction date. While the change is narrow in scope, it can have a meaningful effect on businesses with variable leaseback payments, both for new transactions and for arrangements entered into in past years. Taking the time to build a clear, well documented measurement approach now will save considerable effort and reduce audit friction later.
