Page 210 - pwc-lease-accounting-guide_Neat

Sale and leaseback transactions

subleased) by the seller-lessee to another party under an operating lease. For example, an entity may
purchase a vehicle and lease it to a third party under an operating lease. If the entity then sells the
vehicle to a bank and leases it back under an operating lease, the entity is now a lessee-sublessor and
subject to sale and leaseback accounting, as described in this chapter.

6.3 Determining whether a sale has occurred

A transaction is accounted for as a sale of an underlying asset and a leaseback of that underlying asset
only if the initial transaction qualifies as a sale in accordance with ASC 606, Revenue from Contracts
with Customers (the “revenue standard”), when the buyer-lessor is a customer or ASC 610-20, Other
Income – Gains and Losses from the Derecognition of Nonfinancial Assets (which references the
control guidance in the revenue standard), when the buyer-lessor is not a customer.
1
To qualify as a sale of an asset under the revenue standard, the seller-lessee needs to ensure the
customer (in this case, the buyer-lessor) obtains control of the asset. ASC 842-40-25-1 references the
revenue standard for purposes of evaluating whether the transfer of an asset should be accounted for
as a sale.

ASC 842-40-25-1
An entity shall apply the following requirements in Topic 606 on revenue from contracts with
customers when determining whether the transfer of an asset shall be accounted for as a sale of the
asset:

a. Paragraphs 606-10-25-1 through 25-8 on the existence of a contract

b. Paragraph 606-10-25-30 on when an entity satisfies a performance obligation by transferring
control of an asset.

Sale and leaseback transactions must also be evaluated to determine whether the classification of the
leaseback or the existence of a seller-lessee repurchase option prevent accounting for the transfer of
the asset as a sale. See LG 6.3.4 for information on the impact of lease classification on qualification as
a sale and LG 6.3.5 for information on repurchase rights and obligations in a sale and leaseback
transaction.

6.3.1 Existence of a contract

The first step is to identify the contract. A contract can be written, oral, or implied by an entity’s
customary business practices. Generally, any agreement that creates legally enforceable rights and
obligations meets the definition of a contract.

ASC 606-10-25-1 lists the criteria that must be met for a reporting entity to conclude that a contract
exists.

1 For ease of reference, the remainder of the chapter will refer to the “revenue standard” regardless of whether the buyer-lessor
is a customer.

6-3