EFRAG's Final Comment Letter on ED/2020/4 Lease Liability in a Sale and Leaseback
On 27 November 2020, the IASB issued Exposure Draft ED/2020/4 Lease Liability in a Sale and Leaseback proposing amendments to IFRS 16 Leases.
EFRAG considers that the ED provides evidence of a broader conflict of principles in IFRS 16 regarding the accounting for sales and leaseback transactions and the definition of lease payments. EFRAG therefore encourages the IASB to consider the issue more comprehensively and in a timely manner, possibly as part of the upcoming Post-Implementation review of IFRS 16 or the IASB’s project on Variable and Contingent Consideration.
EFRAG can accept that a temporary and faster solution to address the lack of guidance in IFRS 16, pending a more holistic review of the matter. However, EFRAG encourages the IASB to consider a simplified solution by recognising the profit attributable to the retained interest in the right-of-use asset as a non-lease liability or deferred income rather than a lease liability. This would avoid introducing two different definitions of lease payments depending on whether leases are entered into on a stand-alone basis or via a leaseback.
For sale and leaseback transactions with variable payments only, the IASB could explore a further simplification by considering whether, instead of recognising separately a right-of-use asset and a non-lease liability (or deferred income) the two elements of the transaction could be presented on a net basis.
Finally, EFRAG notes operational challenges associated with implementing the proposals in the ED that would require further consideration and guidance.
The Final Comment Letter can be found here.