The amendments only impact the accounting for the seller-lessee. The amendments do not change the accounting for the buyer-lessor.

As noted in Question 3 above, the seller-lessee measures a right-of-use asset arising from the leaseback as the proportion of the previous carrying amount of the asset that relates to the right of use retained. The gain (or loss) that the seller-lessee recognises is limited to the proportion of the total gain (or loss) that relates to the rights transferred to the buyer-lessor.

The initial measurement of the lease liability that arises from a sale and leaseback transaction is a consequence of how the seller-lessee measures the right-of-use asset and the gain or loss recognised at the date of the transaction.

In other words, the initial measurement of the lease liability is determined as a balancing figure once the right-of-use asset and gain (or loss) have been determined.

This means that the seller-lessee should always recognise a lease liability at the date of the transaction, even if all of the payments for the lease are variable (whether or not they depend on an index or a rate).

The amendments to IFRS 16 require a seller-lessee to apply the subsequent measurement requirements for lease liabilities unrelated to a sale and leaseback transaction to lease liabilities arising from a leaseback in a way that it recognises no amount of the gain or loss related to the right of use that it retains. This entails:

The IASB has not prescribed a particular method for determining the ‘lease payments’ at the commencement date that, when discounted, equal the carrying amount of the lease liability at the commencement date. The amendments illustrate two different approaches for determining the ‘lease payments’ at the commencement date that can be used to reduce the carrying amount of the lease liability over the leaseback term, where there are variable lease payments that do not depend on an index or a rate.

Depending on the circumstances, including which method the seller-lessee used to initially measure the right-of-use asset, either approach could be used to meet the new requirement included in the amendments. The two approaches, set out in a new illustrative example to IFRS 16, are

Both approaches are illustrated in Example 2.

Regardless of which approach is used to subsequently measure the lease liability, the discount rate that the seller-lessee uses to discount the lease payments must be determined in accordance with IFRS 16. The discount rate that the seller-lessee uses is the interest rate implicit in the lease, if that rate can be readily determined. The seller-lessee should carefully consider whether it can readily determine the interest rate implicit in the lease, based on the information that it has available. The seller-lessee uses its incremental borrowing rate if the interest rate implicit in the lease cannot be readily determined.

Entities are not required to estimate expected variable lease payments when initially and subsequently measuring the right-of-use asset and the lease liability. However, estimates of expected lease payments at the sale and leaseback transaction date might be used to initially measure the right-of-use asset (as explained in Question 3 above) and to subsequently measure the lease liability (as explained in Question 5 above). The lease liability is not remeasured to account for changes in the lessee’s expectations for future lease payments subsequent to the commencement date. An exception to this might be when the lease term is reassessed or the leaseback is modified (see Question 8 below).

Generally under IFRS 16, where there is a partial or full termination of a lease, the lessee first accounts for the partial or full termination by decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination and recognising any resulting gain or loss in profit or loss. Secondly, the lease liability is remeasured, considering any revised terms, using a revised discount rate. The difference between the remaining carrying amount of the lease liability after the partial derecognition and the modified lease liability is recognised as an adjustment to the right-of-use asset.

When applied to a leaseback under the amendments, the first step relating to determining the gain or loss on partial or full termination is the same as for other leases. The amendments do not prevent a seller-lessee from recognising in profit or loss any gain or loss relating to the partial or full termination of a lease. This is because a partial or full termination of a leaseback terminates part or all of the right of use that the seller-lessee held before the change to the lease. Any gain or loss relating to the partial or full termination of the lease does not, therefore, relate to a right of use retained but to the right of use now terminated.

However, for the second step when the lease liability is remeasured, the requirements of the amendments apply to the remeasurement of the revised lease payments in order to not recognise any additional gain or loss relating to the right of use retained. See Question 8 below for determining ‘revised lease payments’.

As noted in Question 5 above, the amendments to IFRS 16 require a seller-lessee to apply the subsequent measurement requirements for lease liabilities to lease liabilities arising from a leaseback in a way that recognises no amount of the gain or loss related to the right of use that it retains. These subsequent measurement requirements include the requirements relating to reassessment of the lease liability and lease modifications.

The amendments to IFRS 16 do not illustrate how a seller-lessee applies the amendments if, subsequently, the seller-lessee accounts for a lease term reassessment or a lease modification (referred to as ‘remeasurements’ in this question).

The Basis for Conclusions to the amendments explains that, without the new requirements, a seller-lessee could have recognised a gain on the right of use that it retains solely because of a remeasurement if it had applied the subsequent measurement requirements for lease liabilities unrelated to a sale and leaseback transaction. Particularly, this could have been the case in a leaseback that includes variable lease payments that do not depend on an index or a rate (and that are not in-substance fixed payments); this is because these payments are excluded from ‘lease payments’ as defined in Appendix A to IFRS 16.

For example, assume that the lease payments in Example 1 are wholly variable lease payments that do not depend on an index or a rate. Assume that there is an extension of the leaseback term subsequent to the commencement date. Applying the lease modification requirements in IFRS 16 for leases unrelated to a sale and leaseback transaction, the seller-lessee would remeasure the lease liability by discounting the revised lease payments using a revised discount rate. As noted above, ‘lease payments’ is a defined term in IFRS 16, and it excludes from the measurement of the lease liability variable payments that do not depend on an index or a rate (and that are not in-substance fixed payments). As a result, without the amendments, the subsequent measurement of the lease liability would have been the present value of zero discounted at the revised discount rate. The lease liability would therefore be reduced to nil, with a corresponding adjustment to the right-of-use asset and a resulting gain to profit or loss.

The amendments address the risk of the seller-lessee recognising a gain in this scenario, even though no transaction or event would have occurred to give rise to that gain. The application of the amendments could result in a seller-lessee determining ‘lease payments’ or ‘revised lease payments’ in a way that would be different from the definition of ‘lease payments’ in Appendix A. In other words, the application of the amendments in this scenario would result in the seller-lessee including variable lease payments (whether or not they depend on an index or a rate) in the calculation of ‘revised lease payments’ when remeasuring the lease liability.

Since the amendments do not prescribe a method of determining ‘revised lease payments’ in these circumstances, a seller-lessee should develop an accounting policy that provides useful information about the leaseback transaction. Paragraph 10 of IAS 8 requires the seller-lessee to develop and apply an accounting policy that results in information that is relevant and reliable.

We believe that an accounting policy for determining ‘revised lease payments’ that results in relevant and reliable information would entail determining ‘revised lease payments’ consistently with the determination of ‘lease payments’ prior to the modification or lease term reassessment, as discussed in Question 5 above.

In Example 2 above, the seller-lessee would be able to determine whether the lease payments determined on the commencement date include variable lease payments that do not depend on an index or a rate. For example, if lease payments under the lease contract include fixed lease payments and variable lease payments that do not depend on an index or a rate, and the lease payments (determined using either Approach 1 or Approach 2) exceed the fixed payments, the lease payments used in the example include variable lease payments that do not depend on an index or a rate to some extent. In such a situation, we believe that including contractual variable lease payments that do not depend on an index or a rate in revised lease payments to the same extent or in a similar manner would result in relevant and reliable information, in the event of a remeasurement subsequent to the commencement date. This is illustrated in Example 3 below.

We believe that, if the ‘revised lease payments’ are calculated on a consistent basis as noted above, the requirements in the amendments would be met even if the right-of-use asset is reduced and a gain is recognised for other reasons (such as changes in discount rate, or subsequent modifications that affect the method of determining the variable payments).

If the seller-lessee uses the expected lease payment approach to subsequently measure the lease liability, we believe that it would be acceptable for the seller-lessee to use its revised estimates of variable lease payments as at the remeasurement date to determine ‘revised lease payments’ if the seller-lessee’s expectations of the variable lease payments have changed since the commencement date. This is illustrated in Example 3 below.

The amendments do not require specific additional disclosures (unless they are early adopted – see Question 11 below) relating to sale and leaseback transactions. However, a seller-lessee applying the amendments should disclose material accounting policy information relating to the initial and subsequent measurement of lease payments and revised lease payments for sale and leaseback transactions. For more information on determining what is material accounting policy information, please see PwC’s Practice Aid on Accounting Policies Disclosures.

Entities should also consider the existing IFRS 16 disclosure requirements in the context of their sale and leaseback transactions. For example, IFRS 16 requires disclosure of the expense relating to variable lease payments that are not included in the measurement of lease liabilities. If variable lease payments have been included as lease payments that reduce the amount of the lease liability, only the excess variable payments recognised in profit or loss would be included in this disclosure (see Question 5 above). Any gains or losses on sale and leaseback transactions are required to be disclosed. IFRS 16 also requires qualitative and quantitative information that helps users to assess both sale and leaseback transactions and future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. These disclosures should be specific to the terms and conditions of the sale and leaseback transactions entered into by the entity.

Prior to adoption of the amendments, entities should provide the relevant IAS 8 disclosures relating to the possible impact that application of the amendments will have on the entity’s financial statements in the period of initial application.

In the year of adoption of the amendments, disclosures might be required by IAS 8 to explain the change in accounting policy, including the transitional provisions, and the impact on the financial statements for both the current and prior periods.

An entity applies the requirements retrospectively to sale and leaseback transactions that were entered into after the date when the entity initially applied IFRS 16. For example, an entity that initially applied IFRS 16 from IAS 17 as of 1 January 2019 (as many IFRS reporters did) would apply the amendments to sale and leaseback transactions that were entered into after 1 January 2019.

The use of hindsight is not permitted when retrospectively applying the amendment. For example, an entity that uses the expected lease payment approach to subsequently measure the lease liability, as illustrated in Example 2, should use the estimates that were applicable at the relevant measurement date(s) that reflect circumstances that existed at those dates to estimate lease payments.

The amendments do not apply to sale and leaseback transactions entered into before the date when the entity initially applied IFRS 16. These leases would continue to be accounted for consistently with the original transitional provisions of IFRS 16, which require a seller-lessee in a sale and leaseback transaction that was accounted for as a sale and operating lease under IAS 17 to account for the leaseback in the same way as any other operating lease.

Where an entity applied IFRS for the first time after 1 January 2019, it would have applied IFRS 16, including any permitted exemptions in IFRS 1, in measuring all recognised right-of-use assets and lease liabilities on the date of transition to IFRS. In addition, similar to existing IFRS reporters being able to early adopt IFRS 16, first-time adopters prior to 1 January 2019 might have early adopted IFRS 16 in their first set of IFRS financial statements. We believe that an entity that applied IFRS 16 in its first set of IFRS financial statements would apply the sale and leaseback amendments retrospectively to transactions entered into after the date of transition to IFRS.

An opening statement of financial position should be presented where retrospective application has a material effect on the information in the statement of financial position at the beginning of the preceding period. In accordance with paragraphs 40A-40D of IAS 1, the third statement of financial position is presented as at the beginning of the preceding period, regardless of whether the entity’s financial statements also present comparative information for earlier periods. Entities might also need to consider any incremental regulatory requirements related to the presentation of financial statements where there is retrospective application.