In a sale and leaseback transaction, one party (the seller-lessee) sells an asset it owns to another party (the buyer-lessor) and simultaneously leases back all or a portion of the same asset for all, or part of, the asset’s remaining economic life. The seller-lessee transfers legal ownership of the asset to the buyer-lessor in exchange for consideration, and then makes periodic rental payments to the buyer-lessor to retain the use of the asset.
Sale and leaseback transactions occur in a number of situations and are economically attractive for seller-lessees as they can be used to:
  • Generate cash flows
  • Effectively refinance at a lower rate due to the transfer of tax ownership and related tax benefits
  • Reduce exposure to the risks of owning assets
  • Result in less financing reflected on the balance sheet than under a traditional mortgage
  • Provide temporary transition space to a seller-lessee that is relocating to a new property
Reporting entities often enter into sale and leaseback transactions with appreciated assets, such as real estate, as well as large-ticket assets, such as airplanes, rail cars, and freight ships.
While some transactions are easily identified as sales and leasebacks, certain arrangements required to be accounted for as a sale and leaseback may not be as obvious. For example, when a lease will not commence until after an asset is constructed, the lessee may obtain control of the underlying asset during the construction period, prior to lease commencement. This arrangement may be subject to sale and leaseback accounting.

6.2.1 Sale and leaseback-sublease transactions

A sale and leaseback-sublease occurs when a seller-lessee enters into a sale and leaseback of an underlying asset that is subject to an existing operating lease or is subleased (or intended to be subleased) by the seller-lessee to another party under an operating lease. For example, an entity may purchase a vehicle and lease it to a third party under an operating lease. If the entity then sells the vehicle to a bank and leases it back under an operating lease, the entity is now a lessee-sublessor and subject to sale and leaseback accounting, as described in this chapter.
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