Sales-Leasebacks: the Devil is in The Details
A sale-leaseback takes place when a business offers a possession to a lessor then and leases it back. The leaseback may be for the whole asset or a portion of it (as in property) and for its entire remaining helpful life or for a shorter duration.
Sale-leaseback accounting addresses whether the property is derecognized (eliminated) from the seller's balance sheet, whether any earnings or loss is recognized on the sale and how the leaseback is capitalized back on the seller-lessee's balance sheet.
Under FAS 13 and ASC 840, if the present worth of the leaseback was 10% or less of the possession's reasonable market worth at the time of the sale, any earnings resulting from the sale could be recognized entirely and the leaseback would stay off the lessee's balance sheet because the resulting leaseback would be dealt with as an operating lease.
If the leaseback was higher than 10% and less than 90%, a gain might be acknowledged to the level it exceeded today value of the leaseback, while the leaseback stayed off the balance sheet due to the fact that it was reported as an operating lease. In essence any gain that was less than or equivalent to the PV of the leaseback was deferred and amortized over the leaseback term. The gain would essentially be recognized as a decrease to balance out the future rental expenditure.
For leasebacks equal to or higher than 90%, the possession would stay on the lessee's balance sheet, no gain could be reported and any profits would be treated as loans to the lessee from the buyer.
Under FAS 13 and ASC 840, sale-leasebacks of realty and devices considered important to property included an included caveat. If the leaseback included any form of repaired price purchase alternative for the seller/lessee, it was ruled out a sale-leaseback.
A sale-leaseback takes place when a business offers a possession to a lessor then and leases it back. The leaseback may be for the whole asset or a portion of it (as in property) and for its entire remaining helpful life or for a shorter duration.
Sale-leaseback accounting addresses whether the property is derecognized (eliminated) from the seller's balance sheet, whether any earnings or loss is recognized on the sale and how the leaseback is capitalized back on the seller-lessee's balance sheet.
Under FAS 13 and ASC 840, if the present worth of the leaseback was 10% or less of the possession's reasonable market worth at the time of the sale, any earnings resulting from the sale could be recognized entirely and the leaseback would stay off the lessee's balance sheet because the resulting leaseback would be dealt with as an operating lease.
If the leaseback was higher than 10% and less than 90%, a gain might be acknowledged to the level it exceeded today value of the leaseback, while the leaseback stayed off the balance sheet due to the fact that it was reported as an operating lease. In essence any gain that was less than or equivalent to the PV of the leaseback was deferred and amortized over the leaseback term. The gain would essentially be recognized as a decrease to balance out the future rental expenditure.
For leasebacks equal to or higher than 90%, the possession would stay on the lessee's balance sheet, no gain could be reported and any profits would be treated as loans to the lessee from the buyer.
Under FAS 13 and ASC 840, sale-leasebacks of realty and devices considered important to property included an included caveat. If the leaseback included any form of repaired price purchase alternative for the seller/lessee, it was ruled out a sale-leaseback.