1.2 Leases Including Sale and leaseback and dealers in leased assets

Under the new lease accounting standards, such as IFRS 16 (International Financial Reporting Standard) and ASC 842 (Accounting Standards Codification), there are key changes in the accounting treatment of leases, including sale and leaseback transactions and dealers in leased assets. Here’s an overview of these changes:

1. Lease Classification: Both IFRS 16 and ASC 842 introduce a single lessee accounting model, which eliminates the distinction between operating leases and finance leases. Under the new standards, most leases are recognized on the balance sheet as right-of-use assets and lease liabilities.
2. Recognition of Right-of-Use Assets and Lease Liabilities: Under the new standards, lessees are required to recognize right-of-use assets and lease liabilities for leases with a lease term of more than 12 months. The right-of-use asset represents the lessee’s right to use the leased asset, and the lease liability represents the lessee’s obligation to make lease payments.
3. Sale and Leaseback Transactions: In a sale and leaseback transaction, the seller (originally the owner of the asset) sells the asset to a buyer and immediately leases it back. Under the new standards, if the transaction meets certain criteria, the seller-lessee must evaluate whether the transaction qualifies as a sale. If it does, the seller-lessee derecognizes the asset and recognizes any gain or loss from the sale. The leaseback is accounted for as a finance or operating lease, depending on the terms of the lease.
4. Dealers in Leased Assets: Dealers in leased assets are also impacted by the new lease accounting standards. Dealerships that lease assets to customers need to assess whether their lease arrangements meet the definition of a lease under the new standards. If the dealer retains significant risks and rewards of ownership, the arrangement may be accounted for as a finance lease. Otherwise, it may be classified as an operating lease.