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In the dynamic realm of the shipping industry, sale and leaseback transactions for vessels are common place. These transactions can be structured in various forms, and it's crucial to ensure compliance with accounting standards, specifically IFRS 16, which focuses on substance over legal form. This article delves into the criteria that must be met before accounting for a transfer as a sale under IFRS 16, shedding light on the nuances that impact financial reporting.
Key Considerations:
- Substance over Legal Form:
IFRS 16 emphasizes looking beyond the legal structure and considering the economic substance of the transaction. Even if a sale and leaseback are not structured as a legal sale, if the economic effect is the same, it should be accounted for accordingly.
- Control of Assets:
The transfer should result in the effective passing of control of the asset. If control is retained, such as having the right to buy back the asset below market value at any time, the transaction might not meet the definition of a sale. In such cases, it would be treated as a secured loan against the assets.
- Failed Sale and Leaseback:
If a sale and leaseback transaction fails to meet the criteria for a sale, it should be accounted for as a financing arrangement. The seller-lessee continues to recognize the underlying asset and treats the proceeds from the buyer-lessor as a financial liability.
- Classification of Lease:
Both the seller-lessee and the buyer-lessor must classify the leaseback correctly. If the seller-lessee classifies it as a finance lease or the buyer-lessor as a sales-type lease, control may not be deemed transferred, and the transaction would be treated as a financing arrangement.
- Purchase Option:
The presence of a purchase option within the leaseback is a critical factor. The transaction may still qualify as a sale if the exercise price of the option and the fair value of the asset are equivalent at the time of exercise, and similar assets are readily accessible.
- ASC 842 (US GAAP) Insights:
ASC 842 provides additional insights, highlighting that the mere existence of a leaseback doesn’t guarantee a sale. The classification of the lease by both parties is crucial in determining the transfer of control.
Conclusion: Navigating sale and leaseback transactions in the shipping industry requires a meticulous understanding of IFRS 16 and related accounting standards. Substance over legal form, control of assets, proper lease classification, and careful consideration of purchase options are vital in ensuring accurate financial reporting. Stakeholders in the shipping sector must stay abreast of these considerations to make informed decisions and maintain compliance with evolving accounting standards.
Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
Contributor
Neetu Jose is a Partner at Stuart & Hamlyn Chartered Accountants and a Fellow member of the Institute of Chartered Accountants of India. With over 20 years of professional experience in both India and the UAE, she is a seasoned finance professional. Neetu has accumulated over a decade of industry experience in the UAE, demonstrating proficiency in accounting, auditing, financial advisory services, and UAE VAT. Her diverse background includes working in various sectors such as retail, manufacturing, health & hospitality, and shipping.
