What is IFRS 16 and what does it mean for a sale and leaseback?
Updated: Oct 2
IFRS 16 is the international accounting standard for leases. Since 2019 it has required a business to put almost every lease on its balance sheet — the right to use the building as an asset and the rent it has committed to pay as a liability.
For a sale and leaseback, that ended the idea of ‘off-balance sheet’ property finance. It did not end the case for doing one. The reasons a business sells and leases back its property — releasing capital without borrowing or diluting ownership — are unchanged. What has changed is how the transaction shows up in the accounts, and which numbers lenders, buyers and boards look at.
In this article we will explain what IFRS 16 is, how it treats a sale and leaseback, and what it means for a business thinking about one.
What changed?
Before IFRS 16 took effect in 2019, leases were split into two types under IAS 17 and most national accounting standards: finance leases and operating leases. A finance lease went on the balance sheet. An operating lease — the usual type for a property let on a sale and leaseback — did not. The rent simply ran through the income statement as a cost, and the commitment sat in the notes to the accounts.
IFRS 16 took effect for accounting periods beginning on or after 1 January 2019 and removed that distinction for tenants. Almost every lease now creates two new lines on the balance sheet:
Right-of-use asset — the value of the right to occupy the building for the lease term
Lease liability — today’s value of the rent the business has committed to pay
The rent itself disappears from the income statement. In its place come depreciation of the right-of-use asset and interest on the lease liability. The only exemptions are short leases of 12 months or less and leases of low-value items, such as laptops.
How does IFRS 16 treat a sale and leaseback?
The first question is whether the transaction is a genuine sale. IFRS 16 answers this using the revenue standard, IFRS 15: has control of the property actually passed to the investor?
If it is a sale, the business removes the property from its balance sheet and books the cash. It then recognises a lease liability for the rent and a right-of-use asset. The right-of-use asset is not set at market value — it is the share of the property’s old book value that the business keeps through the lease. Any profit on the sale is only recognised for the part of the property’s value that has genuinely passed to the investor. The rest is deducted from the right-of-use asset and a lower right-of-use asset equates to lower depreciation so that profit is effectively released over the life of the lease.
If it is not a sale, the property stays on the balance sheet and the proceeds are treated as a loan. This is known as a ‘failed sale’. The most common cause is an option for the business to buy the property back at a fixed price. Long renewal options at fixed rents can have the same effect.
The structure of the transaction therefore matters as much for the accounts as for the price. Buy-back options, pricing away from market levels and unusual renewal terms all change the answer.
What does that look like in practice?
Take a warehouse held in the accounts at £6.0m, its historic cost less depreciation. The business sells it for its market value of £10.0m and leases it back for 15 years at £600k a year.
The lease liability is today’s value of 15 years of rent. At a 7% discount rate, that is £5.5m.
The right-of-use asset is the share of the £6.0m book value kept through the lease: £6.0m × (£5.5m ÷ £10.0m) = £3.3m.
The gain recognised is the share of the £4.0m uplift that relates to what was sold: £1.8m. The rest comes through over the lease as lower depreciation.
The business has £10.0m of cash it did not have before, and net assets have risen from £6.0m to £7.8m.
What happens to EBITDA and net debt?
This is where IFRS 16 causes the most confusion, because the answer depends on who is looking.
In the reported accounts, a sale and leaseback no longer reduces EBITDA. The £600k of rent is replaced by depreciation and interest, both of which sit below EBITDA. Reported net debt, on the other hand, now includes the £5.5m lease liability — though with £10.0m of cash coming in, it still falls.
Many lenders and buyers do not use those reported numbers. Loan agreements often measure covenants on the accounting rules in place when the loan was signed (‘frozen GAAP’) or strip lease liabilities out of leverage altogether. Buyers and valuers frequently look at EBITDA before IFRS 16, deducting rent as they always did. On that view, the sale and leaseback reduces EBITDA by the rent.
None of this changes the economics. Rent is a real cost and investors price it as such. What changes is how it is presented, so it is worth checking your loan documents and how any future buyer is likely to look at the business before you transact.
Does it apply to UK private companies?
Increasingly, yes. IFRS 16 applies to listed groups and any company that reports under IFRS. Most UK private companies report under FRS 102 instead, which until recently kept the old split between finance and operating leases.
That has now changed. The Financial Reporting Council’s amendments to FRS 102 bring tenants’ leases onto the balance sheet in a way broadly aligned with IFRS 16, for accounting periods beginning on or after 1 January 2026. The revised standard also takes a simpler approach to recognising gains on a genuine sale and leaseback. For many UK owner-occupiers, accounts for periods starting in 2026 will be the first to show their leases on the balance sheet.
What this means for a business
IFRS 16 removed one historic attraction of a sale and leaseback — keeping the lease off the balance sheet. In practice that was rarely the main reason to do one. Credit analysts and rating agencies had long added leases back into their view of a company’s debt.
The reasons that matter are unchanged:
Capital released — the full value of the property, with nothing to repay
No dilution — shareholders keep 100% of the business
No change on site — the business keeps operating the building as before
What IFRS 16 adds is a set of questions to answer before you sign. Will the transaction qualify as a sale? How will your lenders’ covenants treat the lease? And how will a future buyer view the rent? Getting your auditors involved early, alongside your advisers, avoids surprises once the deal is done.
The final word
IFRS 16 changed how a sale and leaseback is reported, not why a business does one. The lease now sits on the balance sheet, reported EBITDA is protected and the profit on sale is spread differently. The capital released, and the fact that it never has to be repaid, are the same as they always were.
The key is to structure the transaction so it qualifies as a sale, and to understand how your lenders and any future buyer will read the numbers.
Speak to Capcore if you have questions about how a sale and leaseback would look in your accounts, or would like to discuss a specific property. We would be happy to have a no-obligation discussion.
This article is for general information and is not accounting advice. The accounting for any transaction should be agreed with your auditors.
