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Sale and leaseback transactions

6.1 Chapter overview

This chapter discusses the specific accounting considerations applicable to sale and leaseback
transactions. Different accounting outcomes can exist depending on the structure of the transaction.
In addition, the accounting treatment can be complex. It is important to understand the accounting
guidance and key considerations when evaluating a sale and leaseback transaction.

Determining whether a sale has occurred in the context of a sale and leaseback transaction is very
important and determines the initial and subsequent accounting. This chapter details the accounting
for both when the transaction qualifies as a sale and when it does not from both the seller-lessee’s and
buyer-lessor’s perspectives.

See LG 9 for information on the disclosure requirements for sale and leaseback transactions by both
seller-lessees and buyer-lessors.

6.2 Sale and leaseback transactions

In a sale and leaseback transaction, one party (the seller-lessee) sells an asset it owns to another party
(the buyer-lessor) and simultaneously leases back all or a portion of the same asset for all, or part of,
the asset’s remaining economic life. The seller-lessee transfers legal ownership of the asset to the
buyer-lessor in exchange for consideration, and then makes periodic rental payments to the buyer-
lessor to retain the use of the asset.

Sale and leaseback transactions occur in a number of situations and are economically attractive for
seller-lessees as they can be used to:

□ Generate cash flows

□ Effectively refinance at a lower rate due to the transfer of tax ownership and related tax benefits

□ Reduce exposure to the risks of owning assets

□ Result in less financing reflected on the balance sheet than under a traditional mortgage

□ Provide temporary transition space to a seller-lessee that is relocating to a new property

Reporting entities often enter into sale and leaseback transactions with appreciated assets, such as real
estate, as well as large-ticket assets, such as airplanes, rail cars, and freight ships.

While some transactions are easily identified as sales and leasebacks, certain arrangements required to
be accounted for as a sale and leaseback may not be as obvious. For example, when a lease will not
commence until after an asset is constructed, the lessee may obtain control of the underlying asset
during the construction period, prior to lease commencement. This arrangement may be subject to
sale and leaseback accounting.

6.2.1 Sale and leaseback-sublease transactions

A sale and leaseback-sublease occurs when a seller-lessee enters into a sale and leaseback of an
underlying asset that is subject to an existing operating lease or is subleased (or intended to be

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