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Chapter 10 — Sale-and-Leaseback Transactions

10.3 Determining Whether the Transfer of an Asset Is a Sale

10.3 Determining Whether the Transfer of an Asset Is a Sale

The sale-and-leaseback accounting guidance in ASC 842-40 is aligned with ASC 606 in that both focus on the notion of control transfer. In other words, the seller-lessee and buyer-lessor must determine whether the seller-lessee transfers to the buyer-lessor control of the underlying asset. If so, the transfer of the asset is a sale and both parties may apply successful sale-and-leaseback accounting. If not, the transaction is economically a financing arrangement for both parties and must be accounted for as such.
The decision tree below illustrates how the seller-lessee and buyer-lessor would perform the control transfer assessment.

Footnotes

5
Assume that the residual value guarantee, in and of itself, would not preclude transfer of control in the assessment of the risk/reward control indicator in ASC 606-10-25-30(d). See ASC 842-40-55-21 and paragraph BC353 of ASU 2016-02 for further discussion.
6
Assume that the fair value purchase option would satisfy the conditions in ASC 842-40-25-3 to achieve sale accounting. That is, the exercise price of the option is the fair value of the asset at the time the option is exercised and alternative assets, substantially the same as the transferred asset, are readily available in the marketplace.
7
Note that this decision tree is intended to reflect how an entity would proceed with applying the relevant guidance (the appropriate Codification paragraphs are cited) when a contract contains a forward or call option to repurchase the asset for less than its original selling price; it should be read in conjunction with the referenced Codification paragraphs. For example, if such a contract is not with a customer, an entity would be required to apply the scoping guidance in ASC 610-20 to determine whether the contract is part of a sale-and-leaseback transaction. If not, the entity must consider the control transfer guidance in ASC 606-10-25-30 as well as the guidance on repurchase agreements in ASC 606-10-55.
8
Although this section focuses on a seller-lessee’s option to repurchase the underlying asset, we believe that the same concepts would apply to a seller-lessee’s obligation to repurchase the underlying asset upon the occurrence of a contingent event.
9
If the underlying asset is real estate, as discussed in Section 10.3.3.2, the condition in ASC 842-40-25-3(b) cannot be met and sale-and-leaseback accounting is therefore always precluded for a transaction that includes an unconditional repurchase option (or obligation) because there are no alternative assets available in the marketplace that are substantially the same as the real estate transferred in the arrangement.
10
In developing our view, we considered the discussion in paragraph BC218 of ASU 2016-02, which suggests that purchase options and extension options for all of the remaining economic life of the underlying asset should be accounted for in the same way. Ultimately, however, we did not think that the Board’s intent was to create a form of double jeopardy for sale-and-leaseback transactions that satisfy the condition in ASC 842-40-25-2 after considering the probability of exercise of the lessee’s extension options.