Chapter 11 — Control of the Underlying Asset Before Commencement

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).

Changing Lanes

Scope of Accounting Guidance for a Future Lessor in Transactions in Which a Future Lessee (Potentially a Seller-Lessee) Controls the Underlying Asset Before Lease Commencement

As stated above, the sale-and-leaseback guidance in ASC 842-40 addresses transactions in which a lessee controls the underlying asset before lease commencement. The scope of ASC 842-40 applies to both the future lessee and the future lessor in these types of transactions. Thus, the scope of sale-and-leaseback accounting in ASC 842-40 differs from that in ASC 840-40, which applied only to the future lessee (i.e., the seller-lessee). ASC 842 therefore results in a significant change for lessors engaged in these transactions, since they must now 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.

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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.