A sale and leaseback transaction occurs when the seller transfers an asset to the buyer, and then leases the asset from the buyer. This arrangement most commonly occurs when the seller needs the funds associated with the asset being sold, despite still needing to occupy the space. When such a transaction occurs, the first accounting step is to determine whether the transaction was at fair value. This can be judged from either of the following comparisons:
Compare the difference between the sale price of the asset and its fair value.
Compare the present value of the lease payments and the present value of market rental payments. This can include an estimation of any variable lease payments reasonably expected to be made.
If this comparison results in the determination that a sale and leaseback transaction is not at fair value, the entity must adjust the sale price on the same basis just used to determine whether the transaction was at fair value. This can result in the following adjustments:
Any increase to the asset’s sale price is accounted for as a rent prepayment
Any reduction of the asset’s sale price is accounted for as additional financing provided to the seller-lessee by the buyer-lessor. The seller-lessee should adjust the interest rate on this liability to ensure that:
The carrying amount of the asset is not greater than the carrying amount of the liability at the earlier of the termination date of the lease or the date when asset control switches to the buyer-lessor.
In this arrangement, the consideration paid for the asset is accounted for as a financing transaction by both parties. However, if there is a repurchase option under which the seller can later buy back the asset, then the initial transaction cannot be considered a sale. The only exceptions are when:
There are alternative assets readily available in the marketplace, and
The price at which the option can be exercised is the fair value of the asset on the option exercise date.
If a sale and leaseback transaction is not considered a sale, then the seller-lessee cannot derecognize the asset, and accounts for any amounts received as a liability. Also, the buyer-lessor does not recognize the transferred asset, and accounts for any amount paid as a receivable.