10.1 Introduction and Overview

The ability to free up the cash invested in the asset and invest that cash in more profitable or more pressing projects (e.g., paying off corporate debt, reinvesting the cash into operations, funding stock buybacks). This may be particularly advantageous in tight credit markets.

In a sale-and-leaseback arrangement, essentially 100 percent of the asset is financed. This may be a higher level of financing than the seller-lessee ordinarily would be able to obtain.

In sale-and-leaseback accounting, the underlying asset and corresponding debt (if any) are removed from the seller-lessee’s balance sheet and replaced with the ROU asset and lease liability (see Chapter 8), which are typically recorded at a lower value. As a result, certain of the seller-lessee’s financial ratios may improve.

The transaction also may improve the seller-lessee’s income statement. Depreciation expense and interest expense could be reduced, and the cash freed up by the transaction could be invested to obtain a greater return than could be obtained when the cash was invested in the asset. In addition, the seller-lessee may have lower income tax expense, since tax deductions arising from the rental payments could exceed the deductions that had been generated by debt payments. These favorable income statement effects may be offset to some extent by the additional rental expense that will be recognized and reduced tax deductions for depreciation expense.

The transaction allows the seller-lessee to refocus its resources on its primary business operations instead of managing and maintaining fixed assets or real estate.