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A transaction to sell an asset may not meet the definition of a sale in ASC 606 if the seller fails to transfer control. This may happen when there is a call option to repurchase the asset for an amount that is less than its original selling price. In this circumstance, ASC 606-10-55-68 requires the seller to account for the arrangement as a lease in accordance with ASC 842 rather than a sale.

ASC 606-10-55-68

If an entity has an obligation or a right to repurchase the asset (a forward or a call option), a customer does not obtain control of the asset because the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset even though the customer may have physical possession of the asset. Consequently, the entity should account for the contract as either of the following:
a. A lease in accordance with Topic 842 on leases, if the entity can or must repurchase the asset for an amount that is less than the original selling price of the asset unless the contract is part of a sale and leaseback transaction. If the contract is part of a sale and leaseback transaction, the entity should account for the contract as a financing arrangement and not as a sale and leaseback transaction in accordance with Subtopic 842-40.
b. A financing arrangement in accordance with paragraph 606-10-55-70, if the entity can or must repurchase the asset for an amount that is equal to or more than the original selling price of the asset.

It is possible for a “failed sale” transaction under ASC 606 to be classified as a sales-type lease under ASC 842 because it meets, for example, the economic life or the present value criterion. Sales-type lease accounting requires the seller/lessor to recognize selling profit or loss at the commencement date as follows:
  • If the seller/lessor uses leases as an alternative means of realizing value from the goods that it would otherwise sell, the seller/lessor should present revenue and cost of goods sold relating to the sales-type lease in separate line items so that income and expenses from sold and leased items are presented consistently.
  • If the seller/lessor uses leases for the purposes of providing financing, the seller/lessor should present the profit or loss in a single line item.
Thus, even though a seller/lessor might not be able to recognize a sale under ASC 606, it is possible for the seller/lessor to recognize selling profit upfront (via revenue and cost of sales or as a single line item depending upon the seller/lessor’s business model) if the seller/lessor accounts for the transaction as a sales-type lease under ASC 842.
See LG 3 for more details on lease classification, LG 4.3.1 for initial recognition and measurement of a sales-type lease by a lessor, and LG 6.3.5 for repurchase rights and obligations in a sale.
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