11.2 Lessee’s Involvement With an Asset Before Lease Commencement
ASC 842-40
55-1 A lessee may obtain legal title to the underlying asset before that legal title is transferred to the lessor and the asset is leased to the lessee. 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.
55-2 If the lessee obtains legal title, but does not obtain control of the underlying asset before the asset is transferred to the lessor, the transaction is not a sale and leaseback transaction. For example, this may be the case if a manufacturer, a lessor, and a lessee negotiate a transaction for the purchase of an asset from the manufacturer by the lessor, which in turn is leased to the lessee. For tax or other reasons, the lessee might obtain legal title to the underlying asset momentarily before legal title transfers to the lessor. In this case, if the lessee obtains legal title to the asset but does not control the asset before it is transferred to the lessor, the transaction is accounted for as a purchase of the asset by the lessor and a lease between the lessor and the lessee.
ASC 842-40-55-1 and 55-2 clarify that the notion of control is used to determine
whether a transaction is within the scope of the sale-and-leaseback guidance — if
the lessee controls the underlying asset before transferring it to the lessor (and
is thus the deemed owner), the transaction is accounted for in accordance with ASC
842-40. Section
10.2.2.1 includes an example illustrating such a scenario.
When the lessee obtains legal title to the underlying asset before transferring title to the lessor (i.e., the lessee obtains “flash title”) and the lessee does not control the underlying asset before transferring the asset to the lessor, the transaction is not accounted for in accordance with ASC 842-40. ASC 842-40-55-2 provides an example of such a situation, in which an entity often obtains financing or a certain tax treatment.
These same concepts apply to the transfer of an asset under construction, as discussed in Section 11.3.