Sale and Leaseback
Why a company selling its own head office building to raise cash — and then immediately renting it back to keep using it — doesn't always get to book the full sale profit it might expect.
In plain English
Imagine a company owns its head office building outright, carried on its books at ₹200 crore, but currently worth ₹500 crore in the open market. Rather than continuing to sit on that ₹300 crore of unrealised value, the company sells the building to an investor for its full ₹500 crore market value — and simultaneously signs a 10-year lease to rent the exact same building back, so it can keep using it without having to move out. This 'sale and leaseback' genuinely brings in ₹500 crore of cash today. But because the company still retains the RIGHT TO USE the building, it hasn't really given up the whole asset — it has effectively only sold the PORTION of the value corresponding to the rights it's given away. Accounting requires exactly this split to be reflected, rather than letting the company book the entire ₹300 crore gain immediately.
Words you'll need first
A transaction in which a company (the seller-lessee) sells an asset it owns to another party (the buyer-lessor), and simultaneously leases that same asset back for its own continued use. The company gets an immediate cash inflow from the sale, while retaining the practical ability to keep using the asset, now as a tenant rather than an owner.
Under Ind AS 116, if a sale-and-leaseback transaction genuinely qualifies as a sale, the seller-lessee does NOT recognise the full gain on the entire asset. Instead, it only recognises the gain relating to the portion of the asset's rights genuinely TRANSFERRED to the buyer — the RETAINED portion, via the leaseback, continues to be reflected through a new Right-of-Use asset, and the corresponding gain on that retained portion is NOT recognised upfront.
A worked example, with numbers
| Item | ₹ crore |
|---|---|
| Fair value of the building (sale price) | 500 |
| Building's carrying value before the sale | 200 |
| Total gain if the WHOLE asset had simply been sold | 300 |
| Portion of rights TRANSFERRED to buyer (≈60%) | ≈₹180 cr gain recognised immediately in the P&L |
- Even though the company received the FULL ₹500 crore in cash and legally sold 100% of the building, it only recognises roughly ₹180 crore of the ₹300 crore total potential gain immediately — the remaining ≈₹120 crore, relating to the retained leaseback rights, is NOT recognised as an immediate gain.
- Instead, the company recognises a new Right-of-Use asset reflecting its 10-year leaseback rights, initially measured to reflect only the RETAINED portion, plus a matching Lease Liability for the future lease payments it now owes the buyer as its new landlord.
- This prevents companies from using sale-and-leaseback transactions purely as a way to book a large, immediate accounting profit on an asset they're still, in practical economic substance, continuing to use almost exactly as before.
- The full ₹500 crore cash still comes in immediately, giving the company genuine liquidity — this partial-gain-recognition rule affects only the P&L and balance sheet TREATMENT, not the actual cash benefit the company receives.
What it does to the financial statements
Impact on the P&L
- Only the gain relating to the genuinely TRANSFERRED portion of an asset's rights is recognised immediately in the P&L on a qualifying sale-and-leaseback — the gain on the RETAINED portion is deferred, effectively released gradually over the leaseback term.
- This means a sale-and-leaseback transaction typically produces a smaller immediate P&L gain than a simple, clean outright sale of the same asset with no leaseback attached would.
- Companies must specifically assess whether a sale-and-leaseback transaction meets the criteria to be treated as a genuine 'sale' at all under Ind AS 115's revenue recognition principles — if it doesn't qualify, the entire transaction is instead treated as a FINANCING arrangement, with no sale, no gain.
- The new leaseback rental payments create ongoing depreciation and interest expense for the seller-lessee going forward, exactly as covered in the original Lease Accounting article.
Impact on the Balance Sheet
- The company's balance sheet loses the full owned asset but gains cash and a new, smaller Right-of-Use asset plus a matching Lease Liability — a genuinely different, typically more liquid, asset composition.
- Sale-and-leaseback transactions are a genuine, real-world balance sheet monetisation and deleveraging tool: converting an illiquid, owned physical asset into cash, while the company continues operating from the same physical location as a tenant.
- The new Lease Liability created by the leaseback adds to the company's reported debt-like obligations, so a sale-and-leaseback genuinely trades one form of balance sheet exposure (asset ownership) for another (a lease liability).
- For companies with significant owned real estate that isn't core to their operations in an ownership sense, sale-and-leaseback transactions are a recognised strategy for unlocking capital without having to actually vacate or replace the assets.
Which standard covers this
In India this is governed by the sale-and-leaseback-specific provisions within Ind AS 116 – Leases, the same standard covered in the Lease Accounting article, working alongside the sale/revenue recognition criteria in Ind AS 115 to determine whether a genuine sale has actually occurred.
How it's recognised globally
Globally, the equivalent provisions sit within IFRS 16, and Ind AS 116 mirrors its partial-gain-recognition approach closely — this represented a genuinely significant change when IFRS 16 was first introduced, since the PREVIOUS global lease standard (IAS 17) had permitted full, immediate gain recognition on sale-and-leaseback transactions, a treatment companies sometimes used specifically to book a one-off accounting profit. Under US GAAP's ASC 842, a broadly similar sale-qualification and partial-gain approach applies, reflecting a similar post-2019 global convergence in closing this specific accounting technique.
Real example — Indian listed company
WNS Global Services, a business process management company, executed a real, publicly reported sale-and-leaseback transaction for its Pune office property, selling the roughly 170,000 square foot office at an effective price of around ₹10,300 per square foot, while agreeing to lease back the space at a monthly rental of approximately ₹77.5 per square foot, with a built-in 5% annual rental escalation. Transactions like this are a genuine, increasingly common way for Indian companies — particularly IT and business process management firms that own significant office real estate but whose core business isn't property ownership — to unlock capital tied up in owned buildings while continuing to operate from the same premises as a tenant. The accounting mechanics this article describes would apply directly: WNS would only recognise the portion of the gain relating to the rights genuinely transferred to the buyer, with the retained leaseback rights reflected through a new Right-of-Use asset and Lease Liability going forward.
Where you'll see this
Related concepts
Lease Accounting
Why almost every Indian company's balance sheet quietly got bigger in 2019 — without it buying a single new asset.
Lessor Accounting
Why Ind AS 116, the same standard that erased the operating-lease-vs-finance-lease distinction for TENANTS, deliberately left that exact distinction fully intact for LANDLORDS.