The IFRS Interpretations Committee (Committee) discussed the following matter and tentatively decided not to add it to its standard-setting agenda. The Committee will reconsider this tentative decision, including the reasons for not adding the matter to its standard-setting agenda, at a future meeting. The Committee invites comments on its tentative agenda decision. All comments will be on the public record and posted on our website unless a responder requests confidentiality and we grant that request. We do not normally grant such requests unless they are supported by good reason, for example, commercial confidence.
The Committee received a request about the applicability of the sale and leaseback requirements in IFRS 16 to a transaction in which an entity sells its equity interest in a subsidiary that holds one asset and leases that asset back. In the fact pattern described in the request:
The entity enters into a transaction in which:
The request asked whether the entity in its consolidated financial statements applies the sale and leaseback requirements in IFRS 16 and therefore recognises only the amount of the gain that relates to the rights transferred to the third party.
Paragraph 98 of IFRS 16 states that ‘if an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor shall account for the transfer contract and the lease applying paragraphs 99–103’.
In the transaction described in the request, the entity:
The Committee therefore concluded that, in the transaction described in the request,:
Consequently, the gain the entity recognises on the transaction reflects the requirements in paragraph 100(a) of IFRS 16.
Illustrative example
Entity P owns 100% of the equity in Entity S (a subsidiary). Entity S holds only one asset— a building. The building has a fair value of CU800 and a carrying amount of CU500 at the date of the transaction. The net assets of Entity S are also CU500 (ie Entity S has no liabilities) at that date. Entity P enters into a transaction in which:
Applying paragraph B98 of IFRS 10, Entity P in its consolidated financial statements derecognises the building held by Entity S and recognises the fair value of the consideration received.
The transfer of the building satisfies the requirements in IFRS 15 to be accounted for as a sale of the building (paragraph 99 of IFRS 16)—Entity P therefore applies paragraph 100(a) of IFRS 16. Entity P measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the building that relates to the right of use it retains. Entity P determines that it is appropriate to calculate that proportion by comparing the present value of the expected lease payments to the fair value of the building. On this basis, the proportion of the building that relates to the right of use retained is 75%, calculated as CU600 (present value of the expected lease payments) ÷ CU800 (fair value of the building). The proportion of the building that relates to the rights transferred is therefore 25% (CU800 − CU600) ÷ CU800.
Applying paragraph 100(a), Entity P:
At the date of the transaction, Entity P accounts for the transaction as follows:
Dr. Cash |
CU800 |
|
Dr. Right-of-use asset |
CU375 |
|
Cr. Building |
|
CU500 |
Cr. Liability |
CU600 | |
Cr. Gain on rights transferred |
CU75 |
The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for the entity to determine its accounting for the transaction described in the request. Consequently, the Committee [decided] not to add a standard-setting project to the work plan.
The deadline for commenting on the proposals is 23 November 2020. The Committee will consider all comments received in writing by that date; agenda papers analysing comments received will include analysis only of comments received by that date.