Sale-Leaseback Transactions, ASC 840

Leases
SFAS 13, November 1976
“Accounting for Leases”

Sale-Leaseback
1. Entity A sell a property to Entity B
2. Entity B leases the property to Entity A
3. Entity A is the seller-lessee
4. Entity B is the purchaser-lessor

Classification of sale-leaseback by seller-lessee
1. Sale-capital-leaseback
2. Sale-operating-leaseback

Classification of sale-leaseback by purchaser-lessor
1. Purchase-direct-financing-leaseback
2. Purchase-operating-leaseback

Sale-capital-leaseback
1. The lease meets one of (A), (B), (C), (D)
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
–> in proportion to the amortization of the leased asset

Sale-operating-leaseback
1. The lease does not meets any of (A), (B), (C), (D)
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
–> in proportion to the rent expense charged over the lease term

Purchase-direct-financing-leaseback
1. The lease meets one of (A), (B), (C), (D) and both of (E), (F)
2. Record the purchase of property
3. Apply the accounting for a direct financing lease

Purchase-operating-leaseback
1. The lease does not meet the requirement for a direct financing lease
2. Record the purchase of property
3. Apply the accounting for an operating lease

Exceptions
Case 1. The seller-lessee leases only a minor portion
–> of the remaining use of the property

Case 2. The seller-lessee retains
–> more than a minor portion
–> but less than substantially all
–> of the remaining use of the property
and
–> gain on the sale > (2a) or (2b)
(2a) recorded amount of leased asset
(2b) present value of minimum lease payments

Case 3. Fair value of the property < undepreciated cost
Case 1
The sale and the leaseback are recorded
–> as “separate” transactions

Case 2
1. Sale-capital-leaseback
–> Gain on the sale – (2a) is
–> recognized at the time of sale

2. Sale-operating-leaseback
–> Gain on the sale – (2b) is
–> recognized at the time of sale

Case 3
A loss is recognized at the time of sale
–> up to the amount of (3a)
(3a) = undepreciated cost – fair value

Capital lease criteria
(A) Ownership transfer
–> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
–> Lease term ≥ 75% of economic life of the lease property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the lease property

Additional criteria for lessor
(E) Collectibility of minimum lease payment
–> reasonably predictable
(F) No important uncertainties
–> about the additional costs to be incurred by lessor
–> when such costs are not reimbursable

 

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