Tax Consequences
EFFECT OF IFRS-16 ON SALE-LEASEBACK TRANSACTIONS
OFF-BALANCE OR NOT?


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 a Transaction is Considered
- Financial Transaction (e.g., a loan with property as collateral) with no transfer of property and gain/loss recognition? or,
- 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