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Sale and leaseback transactions

Excerpt from ASC 606-10-25-1

An entity shall account for a contract with a customer… only when all of the following criteria are met:

a. The parties to the contract have approved the contract (in writing, orally, or in accordance with
other customary business practices) and are committed to perform their respective obligations.

b. The entity can identify each party’s rights regarding the goods or services to be transferred.

c. The entity can identify the payment terms for the goods or services to be transferred.

d. The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future
cash flows is expected to change as a result of the contract).

e. It is probable that the entity will collect substantially all of the consideration to which it will be
entitled in exchange for the goods or services that will be transferred to the customer.

See RR 2.6 for information on identifying and evaluating the existence of a contract.

6.3.2 Indicators that control of an asset has been obtained

When evaluating if control has been transferred to the buyer-lessor in a sale and leaseback transaction,
ASC 842 requires a reporting entity to look to the five transfer of control indicators in the revenue
standard, which are:

□ The reporting entity has a present right to payment

□ The customer has legal title

□ The customer has physical possession

□ The customer has the significant risks and rewards of ownership

□ The customer has accepted the asset

This is a list of indicators, not criteria. Not all of the indicators need to be met for a reporting entity to
conclude that control has transferred to the buyer-lessor in a sale and leaseback transaction; the
factors should be evaluated collectively to determine whether the buyer-lessor has obtained control.
This assessment should be focused primarily on the buyer-lessor’s perspective. Judgment will be
required to determine whether a sale has occurred. The conclusion will be based on the facts and
circumstances of the transaction. See RR6 for information on determining whether control of an asset
has been transferred.

The sections that follow describe how each of the indicators are applied in the context of a sale and
leaseback transaction.

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