Lease Accounting for Sale-and-Leaseback Transactions – Recap and Expanded Scenarios

A sale-and-leaseback transaction occurs when an entity sells an asset and immediately leases it back from the buyer. These transactions allow companies to free up capital while continuing to use the asset. Under U.S. GAAP (ASC 842) and IFRS (IFRS 16), such arrangements require careful evaluation to determine whether a true sale has occurred and how to account for the resulting lease.

This article revisits the core principles of sale-and-leaseback accounting and provides expanded scenarios, including partial salebacks, failed sales, and adjustments for variable payments.

1. Conditions for a Sale

A sale-and-leaseback transaction qualifies as a sale only if the transfer satisfies the conditions for revenue recognition under ASC 606 or IFRS 15.

✦ The buyer gains control of the asset

✦ There are no obligations to repurchase or retain control

✦ The transaction is at market terms with substance

If these conditions are not met, the transfer is not a sale and is accounted for as a financing transaction.

2. Accounting When the Sale Qualifies

Seller–Lessee Accounting:

✦ Recognize a lease liability and ROU asset based on the leaseback

✦ Derecognize the underlying asset

✦ Recognize gain or loss only for the portion of rights transferred

Example:

✦ Carrying value of asset = $1,000,000 ✦ Sale price = $1,200,000 ✦ 40% of rights retained via leaseback → only 60% gain recognized

Gain = ($1,200,000 – $1,000,000) × 60% = $120,000

Journal entry: Dr. Cash – $1,200,000Dr. ROU Asset – $720,000Cr. Asset – $1,000,000Cr. Lease Liability – $720,000Cr. Gain on Partial Sale – $120,000

3. Accounting When the Sale Fails

If the transaction does not meet the sale criteria:

✦ Continue to recognize the asset on the books

✦ Recognize financial liability for proceeds received

✦ Treat all payments as debt service, not lease payments

Journal entry: Dr. Cash – $1,200,000 / Cr. Financing Liability – $1,200,000.

No gain or loss is recognized in this case.

4. Expanded Case – Sale-Leaseback with Variable Lease Payments

If leaseback payments are entirely variable, the seller-lessee:

✦ Recognizes no lease liability

✦ Retains full ROU asset for use over lease term

✦ Continues to recognize the lease expense as incurred

Dr. Lease Expense – $30,000 / Cr. Cash – $30,000.

Only the gain or loss on sale is recognized upfront, if a sale occurred.

5. Expanded Case – Partial Sale-Leaseback (Portion of Asset)

In some cases, only a portion of the asset is sold and leased back (e.g., one floor of a building). This requires:

✦ Allocating carrying amount and sale proceeds proportionately

✦ Recognizing leaseback and gain/loss only for the sold portion

Example: Building sold: 50% retained Carrying amount = $2,000,000 Sale price for 50% = $1,200,000 Allocate $1,000,000 carrying value → recognize gain or loss based on market

6. Expanded Case – Non-Cash Sale-Leasebacks

If consideration includes non-cash components (e.g., equity, deferred payment), the sale proceeds must be measured at fair value of what is received. This impacts:

✦ Gain calculation

✦ Initial lease measurement

✦ Disclosure of financing elements

7. Disclosure Requirements

Entities must disclose:

✦ Terms and classification of leaseback

✦ Gains or losses on partial or full sales

✦ Failures to qualify as a sale and resulting financing liabilities

✦ Treatment of variable lease payments

✦ Non-cash consideration details (if applicable)

Disclosure example: “During the year, the Company entered into three sale-and-leaseback transactions, derecognizing $7.8 million in assets and recognizing $1.1 million in gains. One arrangement failed sale criteria and was recorded as a $3.5 million financing liability.”