Tax Consequences

Tax Consequences

EFFECT OF IFRS-16 ON SALE-LEASEBACK TRANSACTIONS

OFF-BALANCE OR NOT?

Lease
lease_mobile

WHEN THE SELLER APPLIES IFRS –

Asset transitions from “fixed asset” to “lease asset” on Seller / Lessee’s balance sheet

  • Land and buildings cannot be fully taken off balance sheet
  • IFRS does not recognize operating lease accounting treatment for Seller/Lessee

The Seller / Lessee records a `Lease Asset` and `Lease Liability` of the lease agreement

  • When a lease payment is made, Lessee credits payment (and reduces the lease liability) and debits interest expense. Both are tax deductible expenses
  • Lease asset can also be depreciated over the lease term. Accelerated depreciation of Lease Asset compared to Fixed Asset

The Purchaser/Lessor records “ownership” of the asset

J-GAAP / J-Tax Consequences

FINANCIAL TRANSACTION OR OPERATING/FINANCE LEASE J-GAAP/J-TAX

JGAAP and J Tax -> Determine if the Transaction is a Finance or Operating lease
  • Finance lease: For Seller/Lessee – On balance as fixed asset. For Purchaser/Lessor – Loan
  • Operating lease: For Seller/Lessee – Off balance. For Purchaser – On balance
Land and Building Transaction Under JGAAP/J Tax

To get Operating lease and thus off-balance treatment for Seller/Lessee, the transaction should not meet the following two conditions:

  • Full payout: the total amount of lease payments paid by the lessee during the lease period exceeds approximately 90% of the value normally required to acquire the asset
  • Non-cancellable: the contract cannot be canceled during the lease period
If both conditions are met: the transaction would be a Finance lease (JGAAP) and a Financial Transaction (J Tax)
If a Transaction is Considered
  1. Financial Transaction (e.g., a loan with property as collateral) with no transfer of property and gain/loss recognition?
  2. or,
  3. Operating (or Financial Lease Transaction) – if Operating Lease, an actual transfer resulting in a capital gain/loss to the seller?

    If a Financial Transaction:
    • It is assumed that there is no sale/purchase of property
    • The purchase price payment is characterized as a loan from the lessor to the lessee
    • Lease payments are characterized as the payment of principal and interest on the loan
    • Depreciation will be calculated based on the assumption that the leased property will continue to be held by the lessee