Tag Archives: ASC 840

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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Capital Leases, ASC 840

Leases
SFAS 13, November 1976
“Accounting for Leases”

Lease classification 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 leased property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the leased 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

Capital lease by lessee
1. A lease meets any of (A), (B), (C), (D)
2. The leased property is recognized as an asset by lessee

Capital lease by lessor
A lease is classified as one of the following
(1) sales-type lease
(2) direct financing lease
(3) leveraged lease

Sales-type lease
1. A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
2. The lessor gets manufacturer’s or dealer’s profit or loss

Direct financing lease
1. A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
2. The lessor does not get manufacturer’s or dealer’s profit
3. A lease does not meet the leveraged lease criteria

Leveraged lease
1. A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
2. The lessor does not get manufacturer’s or dealer’s profit
3. A lease meets all of (G), (H), (I)

Leveraged lease combines two transactions into one
Transaction 1: lessor borrows money and purchases the leased property
Transaction 2: lessor leases the property to lessee

Manufacturer’s or dealer’s profit or loss
–> when fair value ≠ carrying amount of the leased property
–> profit when fair value > carrying amount
–> loss when fair value < carrying amount

Leveraged lease criteria
(G) A lease involves at least three parties
–> a lessee, a lessor (equity participant), a long-term creditor
(H) Financing by long-term creditor
–> provides substantial leverage to the lessor
–> is nonrecourse as to the lessor’s general credit
(I) Lessor’s net investment
–> declines during early periods
–> rises during later periods

Capital lease accounting by lessee
–> Recognize the leased property as an asset
–> and recognize a liability for lease payment

Accounting by lessor
1. Sales-type lease
–> The lessor records the lease same as a sale of the property
–> Sales, cost of goods sold, lease receivable, unearned income are recognized by the lessor

2. Direct financing lease
–> Asses is derecognized from the lessor’s records
–> Lease receivable, unearned income are recognized by the lessor

3. Leveraged lease
–> The lessor recognizes the following:
(a) rentals receivable
(b) unearned and deferred income
(c) residual value of leased property
(d) investment tax credit, if applicable

 

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Operating Leases, ASC 840

Leases

SFAS 13, November 1976
“Accounting for Leases”

Lease classification 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 leased property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the leased property

Operating lease by lessee
A lease satisfies none of (A), (B), (C), (D)

Operating lease by lessor
1. A lease is classified as an operating lease by lessor
–> if it is not classified as one of the following:
(1) sales-type lease
(2) direct financing lease
(3) leveraged lease

2. Sales-type, direct financing, leveraged leases are explained in 840-30

Operating lease accounting by lessee
–> Rent is charged to expense by the lessee

Operating lease accounting by lessor
1. The leased property continues to be reported as an asset by the lessor
2. The leased property is depreciated by the lessor
3. Rent income is recognized by the lessor

 

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