If your company has used sale-and-leaseback to free up cash, reclassify assets or smooth earnings this is not just an accounting note. It can affect EBITDA, borrowing covenants, tax positions and investor trust. Below is a practical, no-fluff guide: what changed, why it matters, how to implement, and a short case example you can use with your finance and audit teams.
What have changed from 2024
- Transfer of control is now scrutinised more closely.The amendment emphasises that a sale in a sale-and-leaseback must be a genuine transfer of control at the reporting date. If control hasn’t passed to the buyer, the transaction cannot be treated as a sale.
- Recognition of gain on sale is limited where the seller retains significant rights.If the seller-lessee retains more than an insignificant right to use the asset after the sale, immediate gain recognition is restricted. The right-of-use (ROU) asset and the lease liability must reflect the retained use and actual obligation.
- Measurement of ROU asset changes when sale proceeds are not at market terms.
The ROU asset should be measured considering the actual leaseback terms, including any below-market sale price or off-market financing embedded in the arrangement. - Enhanced disclosure expectations.Companies must clearly explain the economics of the transaction: whether a sale occurred, how the ROU asset is measured, the split of proceeds (finance vs sale), and the impact on profit and cashflow.
Consequences faced by businessess
Gains that were recognised at the time of sale may need to be deferred or reclassified, reducing near-term profit and ROU assets and lease liabilities may rise, affecting gearing and covenant compliance.
A company that looks stronger on operating metrics post-sale may, on closer accounting, show higher financial leverage.Reclassification can change taxable profit timing and trigger covenant breaches if not anticipated.
Weak disclosure or aggressive accounting on sale-and-leaseback invites auditor scrutiny and regulatory interest.
Governance and board level actions
- Board disclosure: Directors should approve a short note summarising all sale-and-leaseback transactions, the accounting treatment, and key judgements.
- Treasury & tax alignment: Where sale proceeds had been used to repay short-term borrowings, treasury must rework liquidity plans. Tax teams must assess timing differences.
- Investor communication: Proactively explain the change to lenders and investors to avoid surprise question marks at quarter results
What are the disclosure requirements:
The amendment is a clear signal that regulators want substance over form. Sale-and-leaseback remains a legitimate business tool, but its accounting now demands evidence that the sale was genuine and that the accounting mirrors the economics.
If your firm has used sale-and-leaseback for cashflow or accounting objectives, don’t wait for year-end or for an auditor to query the file. Run the checklist above, document your commercial case, quantify the impact, and brief your board and lenders.
If you’re advising or evaluating a firm that recently leased back its asset in infrastructure, campus development or real estate this isn’t just a reminder: it’s a red flag. Because the accounting twist isn’t ahead of you it’s behind you, in the past negotiations, documentation and disclosures.