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9.6 Sale and leaseback in transition
Publication date: 31 Jan 2023
us Leases guide
A transaction previously accounted for as a sale and leaseback under ASC 840 should not be reassessed to determine whether it would have qualified as a sale (or purchase) under the guidance in ASC 606. Lessees and lessors should account for the lease in any transaction that qualified as a sale and leaseback in accordance with the lessee and lessor transition requirements. ASC 842-10-65-1 also provides guidance on the accounting for any deferred gain or loss balance after transition.
If a previous sale and leaseback transaction was accounted for as a sale and capital leaseback in accordance with Topic 840, the transferor shall continue to recognize any deferred gain or loss that exists at the later of the beginning of the earliest comparative period presented in the financial statements and the date of the sale of the underlying asset (if an entity elects the transition method in (c)(1)) or that exists at the beginning of the reporting period in which the entity first applies the pending content that links to this paragraph (if an entity elects the transition method in (c)(2)), as follows:
1. If the underlying asset is land only, straight line over the remaining lease term.
2. If the underlying asset is not land only and the leaseback is a finance lease, in proportion to the amortization of the right-of-use asset.
3. If the underlying asset is not land only and the leaseback is an operating lease, in proportion to the recognition in profit or loss of the total lease cost.
If a previous sale and leaseback transaction was accounted for as a sale and operating leaseback in accordance with Topic 840, the transferor shall do the following:
1. Recognize any deferred gain or loss not resulting from off-market terms (that is, where the consideration for the sale of the asset is not at fair value or the lease payments are not at market rates) as a cumulative-effect adjustment to equity unless the entity elects the transition method in (c)(1) and the date of sale is after the beginning of the earliest period presented, in which case any deferred gain or loss not resulting from off-market terms shall be recognized in earnings in the period the sale occurred.
2. Recognize any deferred loss resulting from the consideration for the sale of the asset not being at fair value or the lease payments not being at market rates as an adjustment to the leaseback right-of-use asset at the later of the beginning of the earliest comparative period presented in the financial statements and the date of the sale of the underlying asset (if an entity elects the transition method in (c)(1)), or at the beginning of the reporting period in which the entity first applies the pending content that links to this paragraph (if an entity elects the transition method in (c)(2)).
3. Recognize any deferred gain resulting from the consideration for the sale of the asset not being at fair value or the lease payments not being at market rates as a financial liability at the later of the beginning of the earliest comparative period presented in the financial statements and the date of the sale of the underlying asset (if an entity elects the transition method in (c)(1)), or at the beginning of the reporting period in which the entity first applies the pending content that links to this paragraph (if an entity elects the transition method in (c)(2)).
A sale and leaseback transaction previously accounted for as a failed sale and leaseback transaction in accordance with ASC 840 should be reassessed under the leases standard to determine whether a sale would have occurred (1) at any point on or after the beginning of the earliest period presented in the financial statements under the guidance in ASC 842 (if a reporting entity elects to adjust comparative periods) or (2) at the effective date (if a reporting entity elects to not adjust comparative periods). See LG 6 for information on sale and leaseback accounting. If a sale would have occurred, the sale and leaseback transaction should be accounted for using the lease transition guidance in ASC 842-10-65-1 on a modified retrospective basis from the date a sale is determined to have occurred.
Question LG 9-17 discusses application of sale and leaseback transition guidance for leases that existed prior to the effective date of the leases standard.
Question LG 9-17
Must lessors apply sale and leaseback transition guidance under the leases standard to failed sale and leaseback transactions under ASC 840 that existed prior to the effective date of the leases standard?
Must lessors apply sale and leaseback transition guidance under the leases standard to failed sale and leaseback transactions under ASC 840 that existed prior to the effective date of the leases standard?
PwC response
We do not believe that a buyer-lessor should reassess a successful purchase under the new standard.
The transition provisions require that transactions that “failed” sale-leaseback accounting under ASC 840 through the effective date be reassessed under the leases standard to determine if they would qualify as a sale during the look-back period. Since the sale-leaseback model under ASC 840 did not apply to lessors, but the sale and leaseback model in the leases standard does, it is unclear whether the transition guidance in the leases standard for previous failed sale and leaseback transactions applies to lessor accounting.
We believe a buyer-lessor should not reassess a successful purchase with respect to a previous sale and leaseback transaction that did not qualify for sale-leaseback accounting under ASC 840. Instead, for successful purchases, buyer-lessors should account for the leaseback in accordance with the normal lessor transition guidance.
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