Accounting For Sale And Leaseback Transactions : A ‘sale and leaseback’ is a lease transaction that creates an accounting problem for lessees. Effectively, this type of arrangement involves the sale of an asset that is then leased back from the purchaser for all or part of its remaining economic life. Hence, the original owner becomes the lessee but the asset itself does not move.
In substance, the lessee gives up legal ownership but still retains control over some or all of the asset’s future economic benefits via the lease agreement. Generally, the asset is sold at a price equal to or greater than its fair value, and is leased back for lease payments sufficient to repay the purchaser for the cash invested plus a reasonable return. Therefore, the lease payment and the sale price are usually interdependent because they are negotiated as a package.
Entities normally enter into sale and leaseback arrangements to generate immediate cash flows while still retaining the use of the asset. Such arrangements are particularly attractive where the fair value of an asset is considerably higher than its carrying amount, or where a large amount of capital is tied up in property and plant.
The major accounting issue revolves around the sale rather than the lease component of the transaction. The lease is classified and accounted for in exactly the same fashion as normal lease transactions, but accounting for the sale transaction differs according to whether the lease is classified as a finance lease or an operating lease.
If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognized as income by a lessee. Instead, it shall be deferred and amortized over the lease term.
Sale and leaseback transactions are subject to the same disclosure requirements prescribed for lessees and lessors in relation to both operating and finance leases. Unique or unusual provisions of the agreement should be disclosed as part of the required description of material leasing arrangements. Additionally, sale and leaseback transactions may fall under the separate disclosure criteria in IAS 1 Presentation of Financial Statements with respect to gains or losses on the sale of assets.