Under US GAAP the seller-lessee recognises the whole gain on a qualifying sale, but only after pulling any off-market element of the price out into financing or prepaid rent.
When a sale and leaseback qualifies as a sale under ASC 842, the seller-lessee derecognises the building, recognises the whole gain, fair value less carrying amount, and books an ordinary lease for the leaseback. On an illustrative $50,000,000 building carried at $32,000,000 and leased back for 15 years at $3,000,000 a year, that is an $18,000,000 gain and a $28,208,007 lease liability and right-of-use asset. If the price is off market, the difference is pulled out first: a $55,000,000 price gives the same $18,000,000 gain plus a $5,000,000 loan.
Worked in full in Sale and Leaseback by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The sale test itself, control passing to the buyer under the revenue standard and no seller repurchase option other than one at fair value on an asset with readily available substitutes, is the subject of how to account for a failed sale-leaseback under ASC 842. This page takes the transaction that passes it and works the numbers the seller actually books, including the adjustment that most first drafts miss.
| Input | Value |
|---|---|
| Fair value of the building | $50,000,000 |
| Carrying amount at the date of sale | $32,000,000 |
| Leaseback term, no renewal options | 15 years |
| Market rent, fixed, annual in arrears | $3,000,000 (6.0% of value) |
| Seller-lessee's incremental borrowing rate | 6.5% |
| Lease classification | Operating |
| Off-market case A: price / rent | $55,000,000 / $3,550,000 |
| Off-market case B: price / rent | $45,000,000 / $2,450,000 |
The leaseback must itself be an operating lease for sale accounting to be available: a leaseback classified as a finance lease means control never passed, and the transaction fails.
1. The gain. Derecognise the building and recognise the difference between the consideration, adjusted to fair value, and the carrying amount:
Gain = $50,000,000 − $32,000,000 = $18,000,000, all in the period of sale
2. The lease liability. The present value of the leaseback payments at the incremental borrowing rate, since the lessor's implicit rate is rarely known to the seller:
Annuity factor = (1 − 1.065−15) ÷ 0.065 = 9.4027
Lease liability = $3,000,000 × 9.4027 = $28,208,007
Excel: =PV(6.5%,15,-3000000)
3. The right-of-use asset. Equal to the liability, $28,208,007, with no prepaid rent or initial direct costs to add.
4. Year one. As an operating lease, the seller shows a single straight-line lease cost of $3,000,000. Underneath it, the liability accretes $1,833,520 of interest and falls to $27,041,527 after the first payment, and the right-of-use asset is reduced by the balancing $1,166,480 to the same figure.
Seller and buyer can trade price against rent: a higher price paid back through a higher rent, or a lower price compensated by a lower one. ASC 842 does not let either distort the gain. It compares the price with fair value (or the lease payments with market rents, whichever is more readily determinable) and reclassifies the difference.
Case A, price above fair value. The $5,000,000 excess is additional financing from the buyer-lessor, a financial liability. Part of each rent payment repays it: $5,000,000 ÷ 9.4027 = $531,764 a year. The remaining $3,018,236 is the lease payment, giving a lease liability of $28,379,474. In year one the income statement carries $3,018,236 of lease cost and $325,000 of interest on the financing, $3,343,236 in all.
Case B, price below fair value. The $5,000,000 shortfall is a prepayment of rent. The lease liability is the present value of the $2,450,000 rent, $23,036,539, and the prepayment is added to the right-of-use asset, which becomes $28,036,539. The straight-line lease cost is total payments plus the prepayment over the term: ($2,450,000 × 15 + $5,000,000) ÷ 15 = $2,783,333 a year.
| Line | At market | A: sold at $55m | B: sold at $45m |
|---|---|---|---|
| Cash received | 50,000,000 | 55,000,000 | 45,000,000 |
| Gain recognised | 18,000,000 | 18,000,000 | 18,000,000 |
| Financial liability | 0 | 5,000,000 | 0 |
| Lease liability | 28,208,007 | 28,379,474 | 23,036,539 |
| Right-of-use asset | 28,208,007 | 28,379,474 | 28,036,539 |
| Charge to the income statement, year 1 | 3,000,000 | 3,343,236 | 2,783,333 |
The gain is $18,000,000 in every column. That is the point of the rule: the seller cannot raise the gain by selling high and paying it back in rent, nor depress it the other way.
IFRS 16 recognises only the gain on the rights transferred: the total gain times (fair value less the lease liability) over fair value. US GAAP recognises all of it. The longer the leaseback, the wider the gap.
| Leaseback term | Lease liability | ASC 842 gain | IFRS 16 gain | IFRS share |
|---|---|---|---|---|
| 10 years | 21,566,491 | 18,000,000 | 10,236,063 | 56.9% |
| 15 years | 28,208,007 | 18,000,000 | 7,845,118 | 43.6% |
| 20 years | 33,055,522 | 18,000,000 | 6,100,012 | 33.9% |
On the 15-year leaseback IFRS 16 defers $10,154,882 of the gain inside a smaller right-of-use asset of $18,053,124. A group reporting under both frameworks shows two very different years of sale for one transaction. The IFRS 16 arithmetic is set out in how to calculate the gain on a sale and leaseback under IFRS 16.
Booking the cash received less carrying amount as the gain. In case A that reports $23,000,000, overstating the gain by $5,000,000 and leaving a loan off the balance sheet; in case B it reports $13,000,000 and understates the right-of-use asset by the same $5,000,000. The test is simple: if the rent differs from market, the price differs from fair value, and the PV of the rent difference, $5,171,468 here at the borrowing rate, should be close to the price difference. If it is not, one of the two valuations is wrong.
This is an illustrative walk-through, not accounting advice. Variable rents, renewal options and initial direct costs all change the measurement and should be taken through the standard with the auditors.
The seller's accounting arithmetic sits alongside the pricing in the free workbook for this case, and the economics of the same transaction in the sale and leaseback model.
Yes, if the transfer qualifies as a sale under the revenue standard and the terms are at market. The seller-lessee books the whole difference between fair value and carrying amount: $18,000,000 on an illustrative $50,000,000 building carried at $32,000,000. IFRS 16 would recognise only the share relating to rights transferred, $7,845,118 on a 15-year leaseback.
The excess is additional financing from the buyer-lessor, a financial liability, and part of each rent payment services it. Sold for $55,000,000 against a $50,000,000 fair value, $5,000,000 is a loan repaid by $531,764 of each $3,550,000 rent; the gain stays at $18,000,000, not $23,000,000.
The shortfall is a prepayment of rent and is added to the right-of-use asset. Sold for $45,000,000 with a $2,450,000 rent, the seller still books an $18,000,000 gain, a $23,036,539 lease liability and a $28,036,539 right-of-use asset, and its straight-line lease cost becomes $2,783,333 a year.
This article is one calculation from Sale and Leaseback. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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