ISCA Breakfast Talk: Sale & Leaseback Transactions, Leases And Financing Arrangements

This article was first published in the IS Chartered Accountant, November 2023. Re-published with permission from the Institute of Singapore Chartered Accountants (ISCA).

“Sale and leaseback transactions have not been popular with standard-setters in the past and are still not well received today. Structuring to create a particular accounting outcome is the concern, and the accounting for sale and leaseback transactions does appear to significantly feature anti-abuse measures,” said Lim Ju May, Technical Director & Assurance Principal, CLA Global TS, at the ISCA Breakfast Talk session on October 4.

At the hybrid-format event, Ms Lim offered the participants an in-depth look at sale and leaseback transactions through a series of poll questions and case studies. The process was designed to evaluate their understanding of the scenarios, to determine if each contains a lease.

Identifying whether an agreement is or contains a lease requires judgement, and it can prove challenging because the line between a lease contract and a service contract can sometimes be blurred. Ms Lim re-introduced the Leases Roadmap (first published in the March 2016 issue of this journal), which provided participants with a guide to more accurately determine whether a contract contains a lease. She dwelt on the control element of a lease contract, that is, the right to control the use of an identified asset, and explained how the control element in a lease contract is different from that of an asset ownership.

Both SFRS(I) 16 Leases and SFRS(I) 15 Revenue from Contracts with Customers are intertwined in determining the accounting for repurchase agreements, and sale and leaseback transactions. On this note, Ms Lim shared the issue with sale and leaseback transactions, how to account for such transactions, and the related amendments to SFRS(I) 16. She highlighted two key concepts: (i) to only recognise a portion of the gain from the sale component of sale and leaseback (gain or loss that relates to the right transferred to the buyer-lessor), and (ii) expanded lease measurement to include all variable lease payments.

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Lim Ju May is Technical Director, Assurance Principal, CLA Global TS.

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