11.1 Overview
Transactions in which a lessee controls an underlying asset before the
commencement date of the lease (in a manner discussed below) are within the scope of
the sale-and-leaseback guidance in ASC 842-40. That is, if a lessee controls an
underlying asset in the manner discussed in ASC 842-40-55 before the commencement
date, the lessee must determine whether derecognition is appropriate as a
sale-and-leaseback transaction. Sections 10.2.2 and 10.3 discuss control transfer in accordance
with the sale-and-leaseback guidance in ASC 842-40.
The guidance in ASC 842-40-55 effectively categorizes these transactions into two groups:
- ASC 842-40-55-1 and 55-2 cover transactions in which the lessee is involved with an asset before that asset is transferred to the lessor. See Section 11.2 for more information.
- ASC 842-40-55-3 through 55-6 address transactions in which the lessee is involved with a construction project (i.e., the underlying asset that will be subject to the lease is in the process of being constructed). See Section 11.3 for more information.
In addition, see Section
11.4 for a discussion of the lessee’s accounting for an underlying
asset it controls before lease commencement (i.e., accounting by the “deemed owner”
of the asset).
The scope of ASC 842-40 applies to both the future lessee and the
future lessor in transactions in which a lessee controls the underlying asset before
lease commencement. That is, ASC 842 requires lessors engaged in these transactions
to also assess whether the counterparty in the arrangement (the lessee) has control
of the underlying asset before the commencement date of the lease (i.e., they must
determine whether the seller-lessee has obtained control of the underlying asset
before control is transferred to the buyer-lessor and the asset is leased back to
the seller-lessee).
Entities (both parties) involved in arrangements in which a
construction period is followed by a lease should carefully consider the lessee’s
involvement in the construction project to determine whether the arrangement is
within the scope of the guidance on sale-and-leaseback accounting in ASC 842-40 as a
result of such involvement. The implementation guidance in ASC 842-40-55 addresses
specific situations (not all-inclusive) that would indicate that an arrangement is
within the scope of the sale-and-leaseback guidance in ASC 842-40. See Section 11.3.2 for additional
information.