Chapter 10 — Sale-and-Leaseback Transactions

10.2 Scope of the Sale-and-Leaseback Accounting Guidance

10.2.1 General Scope Considerations

ASC 842-40

05-1 This Subtopic addresses accounting for sale and leaseback transactions when a lease has been accounted for in accordance with Subtopic 842-10 and either Subtopic 842-20 or Subtopic 842-30.

15-1 This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic; see Section 842-10-15.

15-2 If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor, both the seller-lessee and the buyer-lessor shall account for the transfer contract and the lease in accordance with Sections 842-40-25, 842-40-30, and 842-40-50.

15-3 See paragraphs 842-40-55-1 through 55-21 for implementation guidance on the scope of this Subtopic. See Example 3 (paragraphs 842-40-55-39 through 55-44) for an illustration of the scope of this Subtopic.

As noted in paragraph BC349 of ASU 2016-02, the guidance on accounting for sale-and-leaseback transactions in ASC 842-40 substantially differs from that in ASC 840-40. The decision tree below illustrates how an entity would apply the guidance in ASC 842-40 to identify the appropriate accounting for situations in which it transfers an asset to another entity and obtains the right to use that asset.

Changing Lanes

Scope of Sale-and-Leaseback Accounting Guidance for Buyer-Lessors

As illustrated in the decision tree above, the scope of ASC 842-40 applies to both the seller-lessee and the buyer-lessor in a sale-and-leaseback transaction. Thus, the scope of sale-and-leaseback accounting in ASC 842-40 differs from the scope in ASC 840-40, which applied only to the seller-lessee. ASC 842 will therefore result in a significant change for buyer-lessors in sale-and-leaseback transactions, since they must now also assess whether the seller-lessee has transferred control of the underlying asset in the sale leg of the transaction (i.e., they must assess whether they have obtained control).

The decision tree above outlines the scope of the sale-and-leaseback guidance under ASC 842-40 in its simplest form. The implementation guidance in ASC 842-40-55 addresses specific transactions (not all-inclusive) that may be within the scope of the sale-and-leaseback guidance in ASC 842-40. Further, as stated above, the guidance in ASC 842-40-15-2 applies to transactions in which “an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor” but does not specify the type of consideration received from the buyer-lessor in exchange for the transfer of the asset from the seller-lessee. As described in Section 10.1, most sale-and-leaseback transactions are entered into for financing purposes and will involve cash consideration. However, we are aware of transactions that involve all or some nonmonetary consideration (e.g., equity interests in the buyer-lessor in exchange for an asset).

Moreover, the “leaseback” in a sale-and-leaseback transaction must meet the definition of a lease as outlined in Chapter 3. While this determination may be straightforward for real estate or equipment, for which sale-and-leaseback transactions are most common, entities in certain industries such as power and utilities may sometimes enter into unique transactions and may find it more challenging to determine whether a lease exists in such situations.

Connecting the Dots

Sale and Contemporaneous Agreement to Receive the Output of an Asset by the Original Owner

It can be challenging to determine the scope of the sale-and-leaseback guidance in scenarios in which the ongoing exchange transaction may or may not involve the use of an underlying asset. In such cases, it is important to carefully consider whether the leaseback transaction meets the definition of a lease. Specifically, exchange transactions may involve an asset for which HAFWP the asset is used throughout the period of use is predetermined (see Section 3.4.2.3). In such situations, an entity needs to consider whether the customer operates the asset throughout the period of use or whether the customer designed the asset.

Such considerations may apply to exchange transactions in which energy-generating fixed assets (e.g., a solar farm) are sold by the original owner of the asset (that was also involved in building the asset) and the original owner enters into a contemporaneous agreement to receive the asset’s output for a period after the sale. With such assets, it is often common for HAFWP the asset is used throughout the period to be predetermined and for the original owner not to have the right to operate the asset during the period after sale. Accordingly, regarding the determination of whether the contemporaneous agreement to receive the asset’s output is a lease, the original owner must assess whether it designed the asset (see Section 3.4.2.3.2). We believe that because the seller is the original owner that was also involved in building the asset, most will conclude that the seller designed the asset and that, accordingly, this arrangement will be subject to the accounting guidance in ASC 842-40. These arrangements may be common in the power and utilities industry but may also exist for other types of assets such as cell towers and technology servers.

10.2.2 Control of the Underlying Asset Before Lease Commencement

Under ASC 842-40-55-1 through 55-6, transactions in which a lessee controls an underlying asset before the commencement date of the lease are within the scope of the sale-and-leaseback guidance. That is, under ASC 842-40, if a lessee controls an underlying asset before lease commencement, it would recognize the entire asset on its balance sheet and determine whether derecognition is appropriate at lease commencement as a sale-and- leaseback transaction. ASC 842-40-55-1 and 55-2 cover transactions in which the lessee obtains control of the asset before transferring it to the lessor, and ASC 842-40-55-3 through 55-6 address transactions in which the lessee obtains control of a construction project (i.e., the underlying asset that will be subject to the lease is in the process of being constructed).

See Chapter 11 for further details on the guidance in ASC 842-40-55-1 through 55-6 on when the lessee controls an underlying asset before the commencement date of the lease as well as on the subsequent accounting that results.

10.2.2.1 Sale or Transfer of a Purchase Option by a Lessee

Questions have arisen about whether the scope of ASC 842-40 includes transactions in which (1) a company transfers an option to purchase an asset to an unaffiliated third party and the third party is required to exercise the option and lease back the asset to the company, (2) the third party exercises the option, and (3) the company leases back the asset.

If the entity only held the option to purchase the asset but never held title to the asset itself, it must analyze the substance of the purchase option to determine whether possession of the option was substantially the same as control of the asset before it was owned by the unaffiliated third party. The entity must assess the purchase option itself by applying the guidance in ASC 842-40-25-1 to determine whether and, if so, when (further discussed in Section 10.3.1) it transfers control of the asset to the buyer-lessor.

An option that grants to the potential seller-lessee the right to purchase the underlying asset may convey control by conveying certain rights related to the asset before exercise. Although certain risks and rewards of the asset may be transferred to a company when the option is first conveyed to the company (e.g., a fixed-price purchase option that conveys the right to participate in any future appreciation in the asset’s value), we believe that the company typically does not control the underlying asset at that point. Rather, we think that the company controls the underlying asset at the point when it effectively exercises the option itself or by transferring it to an unaffiliated third party (a buyer-lessor) and requiring that the third party exercise it. At that point, the company controls the underlying asset and what happens to it by requiring someone else to exercise the option (the owner of the asset is compelled to transfer the asset in accordance with the option) and requiring the buyer to provide the company with the right to use the asset. Therefore, such a transaction would be subject to the sale-and-leaseback accounting guidance in ASC 842-40. In contrast, simply facilitating the negotiation and sale of an underlying asset between two unaffiliated third parties with an agreement to lease the asset from the buyer would not by itself convey control of the underlying asset to a company.

Example 10-1

Company A writes a call option on real estate in Orange County, California, to Company B on January 1, 2020. Company B transfers the call option to Company C on December 31, 2021, requiring that C exercise the call option and lease the real estate to B. In accordance with this requirement, C exercises the option on December 31, 2021, and leases the real estate to B for five years.

On December 31, 2021, B controls the underlying real estate because it effectively exercised the option by transferring it to C under the condition of exercise. Accordingly, on December 31, 2021, for both B and C, the transaction is subject to the sale-and-leaseback accounting guidance in ASC 842-40.

The discussion and example above represent our perspective on these arrangements. These issues continue to evolve, and it is possible that the FASB and SEC staffs will want to share perspectives on this or related fact patterns. Companies that are involved in these types of arrangements should consult with their accounting advisers and monitor developments on the topic. See also Section 7.6.3.1 of Deloitte’s Roadmap Statement of Cash Flows for a discussion of cash flow impacts resulting from these transactions.

We also believe that the assessment may differ in a transaction in which a company holds an option to purchase an asset that is under construction only at the point at which construction of the asset is complete. This is because, when a company transfers the purchase option to a third party, the third party often is required to exercise the purchase option and lease the asset back to the company only upon completion of construction, and such a transaction is different from the transactions described above. In the transaction described in the example above, the transferred purchase option includes a present right to exercise that option and, accordingly, differs from a purchase option that can only be exercised upon completion of construction, since the right associated with that purchase option is in the future. Accordingly, in these situations, an entity may be required to perform additional analysis to determine whether the transaction is subject to the accounting guidance in ASC 842-40.

10.2.3 Other Scope Considerations

The next sections address other scope considerations related to the sale-and-leaseback accounting guidance in ASC 842-40.

10.2.3.1 Lessee Indemnification for Environmental Contamination

ASC 842-40

55-7 A provision that requires lessee indemnifications for preexisting environmental contamination does not, on its own, mean that the lessee controlled the underlying asset before the lease commenced regardless of the likelihood of loss resulting from the indemnity. Consequently, the presence of such a provision does not mean the transaction is in the scope of this Subtopic.

10.2.3.2 Sale Subject to a Preexisting Lease

ASC 842-40

55-8 An entity owns an interest in an underlying asset and also is a lessee under an operating lease for all or a portion of the underlying asset. Acquisition of an ownership interest in the underlying asset and consummation of the lease occurred at or near the same time. This owner-lessee relationship can occur, for example, when the entity has an investment in a partnership that owns the underlying asset (or a larger asset of which the underlying asset is a distinct portion). The entity subsequently sells its interest or the partnership sells the underlying asset to an independent third party, and the entity continues to lease the underlying asset under the preexisting operating lease.

55-9 A transaction should be subject to the guidance in this Subtopic if the scope or price of the preexisting lease is modified in connection with the sale. If the scope or the price of the preexisting lease is not modified in conjunction with the sale, the sale should be accounted for in accordance with other Topics.

55-10 A lease between parties under common control should not be considered a preexisting lease. Accordingly, the guidance in this Subtopic should be applied to transactions that include nonfinancial assets within its scope, except if Topic 980 on regulated operations applies. That is, if one of the parties under common control is a regulated entity with a lease that has been approved by the appropriate regulatory agency, that lease should be considered a preexisting lease.

The example below illustrates the application of the guidance in ASC 842-40-55-8 and 55-9.

Example 10-2

Company A has a 50 percent ownership interest in a property that consists of warehouse space and office space. Currently, A leases all of the warehouse space, which comprises 75 percent of the building’s total square footage, and the lease is classified as an operating lease. Company A proposes to sell its entire ownership interest in the property to an unrelated third party, Acquirer X, but to continue to lease the warehouse space.

To the extent that A and X do not modify the price or scope of A’s lease of the warehouse space, neither party would need to assess this transaction by using the sale-and-leaseback accounting guidance in ASC 842-40.

The section below further discusses the application of the guidance in ASC 842-40-55-10.

10.2.3.2.1 Intercompany Sale-and-Leaseback Transactions

Consider a scenario in which a subsidiary owns equipment that it leases to its parent company or to other subsidiaries, and the subsidiary sells the equipment subject to the existing intercompany lease to an unrelated third party. The subsidiaries are consolidated with the parent company for financial reporting purposes. Neither of the parties to the transaction is a regulated entity.

The sale of equipment subject to an existing intercompany lease should be assessed in accordance with the sale-and-leaseback accounting guidance in ASC 842-40. The equipment lease that was in effect before the sale was eliminated in consolidation. Therefore, at the consolidated level, there was no lease. Since the parent and the subsidiary had the ability to cancel the lease before the sale to the unrelated third party but chose not to, there is a presumption that the sale and the terms of the leaseback were considered together in the seller-lessee’s discussions with the buyer-lessor and that the transactions should be treated as one integrated transaction within the scope of ASC 842-40. It would not be appropriate to consider the lease a preexisting lease in such cases.

10.2.3.2.2 Leaseback of Assets by an Acquiree After a Business Combination

If a seller leases back an asset that was acquired by the acquirer in a business combination accounted for under ASC 805, the transaction is outside the scope of the sale-and-leaseback guidance in ASC 842-40. That is, the lease is evaluated as a new lease and is accounted for in accordance with other guidance in ASC 842. For more information about the accounting for leases in a business combination, see Chapter 4 of Deloitte’s Roadmap Business Combinations.

10.2.3.2.3 Third-Party Lessor Involvement in a Business Combination

In a business combination, a third party may acquire assets directly from the acquiree before the business combination and subsequently lease those assets to the acquirer after the acquisition.

When a third party acquires assets directly from an acquiree before a business combination to subsequently lease those assets to the acquirer, and that transaction is either contingent on or in contemplation of the business combination, we believe the assets have been transferred to the acquirer (i.e., the acquirer has obtained control of the assets) just before, or concurrently with, the business combination. This is because the acquirer could preclude the sale of the assets to the third party by not completing the business combination. Therefore, the assets acquired by the third party are effectively controlled by the acquirer, albeit momentarily, before the sale to the third party can be completed. In this scenario, we believe that it should be presumed that sale of the assets from the acquiree to the third party and subsequent leaseback of the assets from the third party to the acquirer were entered into in contemplation of one another and in connection with the business combination. In substance, the acquirer/lessee directed the acquiree to sell the assets to the third party with a subsequent leaseback to the acquirer, which has the effect of financing part of the business combination.

We believe that the acquirer/lessee has gained control of the assets before the third party (lessor) and therefore that the guidance in ASC 842-40-55-1 would be applicable. This guidance states, in part:

If the lessee controls the underlying asset (that is, it can direct its use and obtain substantially all of its remaining benefits) before the asset is transferred to the lessor, the transaction is a sale and leaseback transaction that is accounted for in accordance with this Subtopic.

Accordingly, we believe the acquirer/lessee should account for the transaction as (1) a business combination in which the assets are included in the acquired asset set and (2) a sale-and-leaseback transaction with the third party for the assets in accordance with ASC 842-40; it would not be appropriate to instead exclude the assets from the acquired asset set in the business combination and record a separate lease of the assets from a third party. The amount of consideration transferred by the acquirer to effect the business combination should include the amount paid by the third party to the acquiree for the assets,1 since it is in effect a payment being made on behalf of the acquirer.

10.2.3.3 Sale-Leaseback-Sublease Transactions

ASC 842-40

55-18 An entity enters into a sale and leaseback of an asset that meets either of the following criteria:

The asset is subject to an operating lease.
The asset is subleased or intended to be subleased by the seller-lessee to another party under an operating lease.

55-19 A sale-leaseback-sublease transaction is within the scope of this Subtopic. The existence of the sublease (that is, the operating lease in paragraph 842-40-55-18(a) or (b)) does not, in isolation, prevent the buyer-lessor from obtaining control of the asset in accordance with paragraphs 842-40-25-1 through 25-3, nor does it prevent the seller-lessee from controlling the asset before its transfer to the buyer-lessor (that is, the seller-lessee is subject to the same requirements for determining whether the transfer of the asset is a sale as it would be without the sublease). All facts and circumstances should be considered in determining whether the buyer-lessor obtains control of the underlying asset from the seller-lessee in a sale-leaseback-sublease transaction.

A seller-lessee (seller-sublessor) and buyer-lessor may enter into a sale-and-leaseback transaction involving an asset that either (1) is subject to an existing operating lease (i.e., such that the original owner sells the asset subject to the operating lease and leases it back to continue performing economically as a lessor) or (2) is or will be subleased to a third party under an operating lease (i.e., such that the original owner sells the asset, leases it back, and executes a sublease agreement with a third party). Contractual provisions allowing a seller-lessee to sublease the underlying asset are common in leaseback arrangements because they allow the seller-lessee to sublease the property without having to renegotiate the terms of its lease with the buyer-lessor. The seller-lessee may wish to retain a right to sublease the property in case its continued leasing of the property becomes uneconomic in light of its business plan. For example, a restaurant owner may want to retain its right to sublease the property in case several years into the lease term the surrounding area’s demographics change and adversely affect the restaurant’s operations.

Such transactions are within the scope of the sale-and-leaseback accounting guidance in ASC 842-40. The seller-sublessor and buyer-lessor must follow the steps in the decision tree in Section 10.2.1 and assess whether the seller-sublessor transfers control of the asset to the buyer-lessor.

See Chapter 12 for a detailed discussion of the sublease accounting requirements in ASC 842.

10.2.3.4 Other Transaction Types

Although ASC 842-40-55 identifies certain scope considerations, it may be difficult to tell whether other complex transaction types reflect the economic substance of a sale and leaseback or a financing arrangement. The sections below address various transaction types that we think should be assessed in accordance with the guidance in ASC 842-40 on sale-and-leaseback transactions.

10.2.3.4.1 Separate Analysis of the Land and Building Components of a Lease

If undeveloped land is sold to a developer to construct a building and the developer leases the completed building and land back to the seller, the lease of the land and the building should not be accounted for as a single sale-and-leaseback transaction.

Rather, in this circumstance, the lease of the land and the building should be accounted for as separate lease components in accordance with ASC 842-10-15-29. Since the land element was previously controlled by the lessee, the leaseback of the land should be accounted for as a sale-and-leaseback transaction. The lease of the building element is not within the scope of the sale-and-leaseback guidance in ASC 842-40 because the building was never controlled by the lessee and thus control of an asset (the building) was not transferred. The building lease should be accounted for in accordance with the lease classification criteria in ASC 842-10-25-1 and 25-2.

10.2.3.4.2 Treatment of Sales Agreements in Which the Seller Retains an Option to Lease the Asset Transferred

Transactions involving the transfer of an asset to a purchaser, if the seller has the contractual obligation, or has been granted the option, to enter into a leasing arrangement with the purchaser for use of that same asset, generally should be accounted for in accordance with ASC 842-40. The same is presumed when an asset transfer is subsequently followed by a separate transaction in which the original seller agrees to lease the same asset from the original purchaser.

An entity would need to have persuasive evidence to support an assertion that such a transaction is not within the scope of ASC 842-40.

10.2.3.4.3 Concurrent Sale and Leasing Transactions That Involve Different Assets but the Same Counterparty2

When an entity transfers an asset to a purchaser while entering into a concurrent arrangement to lease a similar, but not the same, asset from the same purchaser, there is a rebuttable presumption that such an arrangement should be accounted for as one integrated sale-and-leaseback transaction, even if the asset being leased is not the exact asset that was sold. This presumption can only be overcome when there is sufficient evidence that the transactions are, in fact, independent transactions. If the presumption cannot be overcome, the seller-lessee and buyer-lessor should account for the transactions together as a sale-and-leaseback transaction in accordance with ASC 842-40.

10.2.3.4.4 Sale of Construction in Process With a Leaseback of the Asset After Completion of Construction

A company (the “seller” or “seller-lessee”) may enter into an arrangement with a developer (the “buyer” or “buyer-lessor”) to transfer construction in process (CIP) to the developer. In such an arrangement, the developer will complete construction of the asset (the “completed construction”) and lease it back to the seller. The CIP that the seller transfers to the buyer can be in different phases of development. For example, a building may be in the following phases of construction when transferred to a buyer:

Only soft costs3 have been incurred.
The land has been cleared or graded to prepare for construction of the building.
A physical structure has begun to take form, such as a foundation and steel beams.
Progress has been made toward a building with an unfinished interior.
Substantial progress has been made toward completion of a building.

Under the previous leasing guidance in ASC 840-40-55-44, an entity was subject to the ASC 840 sale-and-leaseback requirements if the entity had begun construction activities, including the following:

Begun construction (broken ground)
Incurred hard costs (no matter how insignificant the hard costs incurred may be in relation to the fair value of the property to be constructed)
Incurred soft costs that represent more than a minor amount of the fair value of the leased property (that is, more than 10 percent of the expected fair value of the leased property).

ASC 840 included indicators of when an entity with CIP may be subject to the sale-and-leaseback requirements. However, no such indicators exist under ASC 842. Rather, ASC 842 does not explicitly address whether the sale of CIP that will be leased back at completion of the construction is subject to sale-and-leaseback guidance. On the basis of a technical inquiry with the FASB staff, we understand that there may be a range of acceptable approaches to determining whether the transfer of CIP is subject to sale-and-leaseback accounting. For example, we understand that it would be acceptable to conclude that the transfer of CIP accompanied by an agreement to lease the completed construction is always subject to sale-and-leaseback accounting (regardless of the stage of construction or the amount of costs incurred). On the other end of the spectrum, we also understand that it would be acceptable for entities to consider whether (on the basis of the stage of construction) the CIP sold is substantially similar to the underlying asset that will be leased back. That is, in some cases, the CIP might not yet be substantially similar to the asset to be leased back and, as a result, sale-and-leaseback accounting may not be required. In determining whether this is the case, an entity will most likely need to use judgment and consider various qualitative factors. We believe that it also may be appropriate for an entity to consider quantitative thresholds (e.g., whether the fair value of the CIP represents 90 percent or more of the expected value of the completed construction) to help inform an overall qualitative assessment of whether the CIP is substantially similar to the underlying asset to be leased back at the end of construction. If an entity chooses to apply a quantitative threshold, the approach should be applied to real estate on a comparable basis in such a way that the fair value of the completed construction is not computed by using inputs in which the subsequent use of the completed asset is considered. For example, in real estate to be leased, this analysis should be performed on the basis of the fair value of the partially completed asset and the vacant completed asset, rather than a completed asset with an in-place lease.

Although the approaches described above result in very different accounting treatments, on the basis of the technical inquiry with the FASB staff, we believe that each of these approaches represents a reasonable application of the guidance.4 We believe that companies should elect one approach as an accounting policy and should apply it consistently.

10.2.3.4.5 Seller-Lessee’s Subsequent Accounting for Arrangements Involving the Transfer of CIP

When an arrangement involving the transfer of CIP is subject to the sale-and-leaseback guidance in ASC 842, questions have arisen about the subsequent accounting for that arrangement for the seller-lessee. One of the primary conditions for derecognizing an asset in a sale-and-leaseback transaction is that the leaseback is not a finance lease. Since certain components of the lease classification analysis cannot be known as of the date of the transfer of CIP, such as the discount rate and the fair value of the property as of the commencement date, it is not possible to assess and achieve sale-and-leaseback accounting until the lease commencement date.

This conclusion holds true even if the seller-lessee expects the leaseback to be an operating lease and no purchase option will exist after the lease commencement date. That is, once the seller-lessee is deemed the owner of an asset under construction (even if the seller-lessee loses control of the asset), it will not be possible to achieve sale-and-leaseback accounting until lease classification is determined, which is not possible under ASC 842 until lease commencement.

In addition, we believe that costs incurred both before and after the transfer of CIP to the buyer- lessor are related to a single unit of account. Therefore, the seller-lessee would perform the following accounting when the transfer of CIP is subject to the sale-and-leaseback guidance in ASC 842:

Continue to record the existing CIP on the balance sheet (i.e., do not derecognize the partially completed asset).
Capitalize all incremental costs of construction (whether funded by the seller-lessee or the buyer-lessor).
Record an associated financing obligation (see Section 10.4.2) for costs funded by the buyer-lessor, including any funds received for the transfer of CIP.
Upon completion of construction, apply the sale-and-leaseback guidance to determine whether the completed construction can be derecognized (see Section 10.3).

When an arrangement involving the transfer of CIP is determined not to be subject to the accounting guidance in ASC 842-40 after the substantially similar quantitative threshold described above is applied, both the seller-lessee and buyer-lessor will need to apply build-to-suit accounting to determine whether the lessee is the accounting owner of the CIP (see Chapter 11). If the lessee is deemed to be the accounting owner, the lessee should not derecognize the CIP on the legal sale date. However, if the lessee is not the accounting owner after the legal sale date, the lessee must apply the appropriate derecognition framework (for example, ASC 610-20 or, in some cases, ASC 606) to determine whether a sale occurred.

10.2.3.4.6 Partial Sales Transactions Under ASC 842-40

The guidance in ASC 842-40 also applies to sales and subsequent leasebacks of nonfinancial assets. For example, if a seller transfers a real estate asset into a newly formed joint venture, retains a noncontrolling interest in the joint venture, and subsequently leases back the real estate asset from the joint venture, the seller would need to evaluate whether the transfer of the asset represents a successful sale in accordance with ASC 842-40.

Footnotes

We have assumed that the amount paid by the third party to the acquiree would be known by the acquirer. However, to the extent this amount is not known, the acquirer should impute a purchase price for the assets by considering the fair market value of the assets purchased and any off-market lease terms in the leaseback.

This section addresses the applicability of sale-and-leaseback guidance to concurrent sales and leases of similar, completed assets. See Section 10.2.3.4.4 for a discussion of the applicability of sale-and-leaseback guidance to sales of CIP with a leaseback of the completed asset.

The legacy guidance in ASC 840-40-55-42 states, “In some build-to-suit lease transactions, the lessee may incur certain development costs before entering into a lease agreement with the developer-lessor. Those costs may include both soft costs (for example, architectural fees, survey costs, and zoning fees) and hard costs (for example, site preparation, construction costs, and equipment expenditures).”

In addition, we believe that there may be a range of other acceptable approaches between the two approaches outlined above. Companies that are involved in these types of arrangements should consult with their accounting advisers when electing an approach.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.