1. Testing for a Valid Asset Sale
In a sale and leaseback transaction, an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and then leases that same asset back. To determine the accounting treatment, the entity must check whether the transfer qualifies as a valid sale under the revenue recognition standards (IFRS 15 / ASC 606).
                 ┌────────────────────────────────┐
                 │ Does Transfer Qualify as Sale? │
                 └───────────────┬────────────────┘
                                 │
        ┌────────────────────────┴────────────────────────┐
        ▼                                                 ▼
┌───────────────┐                                 ┌───────────────┐
│      YES      │                                 │      NO       │
└───────┬───────┘                                 └───────┬───────┘
        │                                                 │
 Seller-lessee recognizes                          Failed sale. Transaction is
 a partial gain restricted                         treated as a secured loan
 to rights transferred.                            under both frameworks.
        ▼                                                 ▼
┌───────────────────────┐                         ┌───────────────────────┐
│  Partial Sale / Lease │                         │  Financial Liability  │
└───────────────────────┘                         └───────────────────────┘

2. Accounting Treatment for a Failed Sale
If the transfer does not satisfy the requirements to be recorded as an asset sale:
  • Seller-Lessee: Continues to recognize the transferred asset on its balance sheet and records a Financial Liability equal to the cash proceeds received from the buyer-lessor.
  • Buyer-Lessor: Does not recognize the asset. It records a Financial Asset (Loan Receivable) equal to the cash advanced. The transaction is treated as a secured borrowing arrangement.

 
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