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Sale and leaseback transactions

6.3.2.1 Seller-lessee has a present right to payment (or buyer-lessor has a present obligation
to make payment)

A buyer-lessor’s present obligation to pay could indicate that the seller-lessee has transferred the
ability to direct the use of the asset and the buyer-lessor has obtained substantially all of the remaining
benefits from the asset. The seller’s motivation in a typical sale and leaseback transaction is to
generate liquidity. Accordingly, the buyer-lessor typically pays the agreed upon purchase price for the
asset upfront, in which case this indicator would be satisfied. In instances where the buyer-lessor does
not make an upfront payment, the seller-lessee will need to further evaluate whether a present right to
payment exists.

6.3.2.2 Buyer-lessor has legal title

The party that has legal title is typically the party that can direct the use of and receive the benefits
from an asset. The benefits of holding legal title include the ability to sell an asset, exchange it for
another good or service, or use it to secure or settle debt, all of which indicate that the holder has
control.

While not determinative in isolation, we believe the transfer of legal title to a buyer is an important
indicator when distinguishing between whether a transaction results in a sale or a lease of an asset.

6.3.2.3 Buyer-lessor has physical possession

Physical possession of an asset typically gives the holder the ability to direct the use of and obtain
benefits from that asset; therefore, it is an indicator of which party controls the asset. However,
physical possession does not, on its own, determine which party has control. A reporting entity should
consider the facts and circumstances of each arrangement to determine whether physical possession
coincides with the transfer of control.

In a typical sale and leaseback transaction, the buyer-lessor obtains legal title to the asset concurrent
with commencement of the leaseback term. The buyer-lessor obtains the rights of ownership and is
deemed to have physical possession of the asset, but grants the seller-lessee a right-of-use interest (i.e.,
a lease) in the underlying asset.

6.3.2.4 Buyer-lessor has the significant risks and rewards of ownership

A seller-lessee that has transferred risks and rewards of ownership of an asset has typically transferred
control to the buyer-lessor, but not in all cases. Both parties to the arrangement will need to determine
whether control has transferred in the event the seller-lessee has retained some of the risks or rewards
of ownership.

Judgment may be required when determining if the buyer-lessor has obtained the significant risks and
rewards of ownership or if certain risks have been retained by the seller-lessee that would preclude the
buyer-lessor from controlling the asset.

6.3.2.5 Buyer-lessor has accepted the asset

Whether the buyer-lessor has accepted the asset, as with all indicators of transfer of control, should be
viewed from the buyer-lessor’s perspective. Whether the buyer-lessor has formally accepted the asset
should be taken into consideration along with the other indicators that control has been obtained by

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