Aircraft sale and leaseback

When is a sale and leaseback a sale?

IFRS 16 applies IFRS 15's control requirements to decide whether the airline has sold the aircraft. The leaseback itself does not prevent a sale, unless it is in substance a financing, such as a leaseback for almost all of the aircraft's remaining life. A substantive option or obligation for the airline to buy the aircraft back usually means control has not passed, so there is no sale. Price, payment terms and whether the lessor bears the risks of the residual value are also part of the assessment. See IFRS 16 sale and leaseback.

Sale and leaseback of a new aircraft

An airline takes delivery of a new aircraft carried at US$ 50 million, its cost after manufacturer credits. It sells it immediately to a lessor for its fair value of 55 million and leases it back for 12 years at 4.4 million a year in arrears. The airline's incremental borrowing rate is 6%, so the present value of the lease payments is 36.89 million. The transfer is a sale.

The airline keeps the use of the aircraft for 12 years, which is worth 36.89 million of its 55 million value, so it treats that part as never sold: the right-of-use asset is measured at the matching share of the old carrying amount, and the gain on it, 3.35 million, is not recognised. That amount comes through over the lease as lower depreciation of the right-of-use asset. The gain recognised relates only to the residual interest the lessor now owns.

What if the price is not fair value?

Airlines and lessors often trade a higher sale price for higher rents. If the aircraft is sold for US$ 58 million when its fair value is 55 million, the excess of 3 million is additional financing from the lessor, a financial liability repaid through part of the rents, and the gain is calculated on fair value. If the price is below fair value, the shortfall is a prepayment of lease payments, added to the right-of-use asset. Fair value is assessed with appraisals of the aircraft, and the rent is compared with market lease rates, whichever is more readily determinable.

What if the lessor buys directly from the manufacturer?

In many deals, the airline assigns its purchase rights to the lessor, which pays the manufacturer and takes title at delivery. If the airline never obtains control of the aircraft, there is no sale and leaseback: the airline is simply a lessee, and any amounts the lessor pays it, such as reimbursements of pre-delivery payments, are assessed separately. Taking legal title for a moment before passing it on does not by itself mean the airline obtained control. The difference matters because only a sale and leaseback can give the airline a gain, and the analysis of control can be finely balanced when the airline holds title briefly.

What about variable rents?

An amendment to IFRS 16, effective from 2024, requires the airline to measure the lease liability in a sale and leaseback so that it recognises no gain or loss relating to the right of use it keeps, even when the rents are variable, for example linked to flight hours. Later remeasurements of the liability cannot produce a gain on the retained right of use. Rents linked to an interest rate, common in aircraft deals, are included in the liability at the current rate. See aircraft leases under IFRS 16.

What happens if it is not a sale?

The airline keeps the aircraft on its balance sheet as property, plant and equipment, continues to depreciate it, and recognises the proceeds as a financial liability under IFRS 9, with the rents split into interest and repayment. The lessor records a loan receivable, not an aircraft. Aircraft financed through Japanese operating leases with call options, or other structures with repurchase rights, often end up here. Ship owners use the same structures heavily; see vessel sale and leaseback.

How does US GAAP differ?

Under ASC 842, a successful sale and leaseback lets the airline recognise the full gain, adjusted only for off-market terms, so the US$ 5 million would be recognised in full at delivery. A sale fails if the leaseback is a finance lease or the airline has a repurchase option, other than in narrow circumstances, which makes failed sales more common than under IFRS 16. See IFRS 16 vs ASC 842 and airline accounting.

This guide is general information. It is not tax or legal advice for your situation.