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Sale and leaseback transactions

the buyer-lessor in a sale and leaseback transaction. See RR 6.5 for information about customer
acceptance.

6.3.2.6 Impact of a prospective lessee obtaining control of an underlying asset prior to lease
commencement

Depending on the terms of an arrangement, a prospective lessee may obtain control of an underlying
asset prior to lease commencement. If a lessee obtains control of an underlying asset before the lease
commencement date, the transaction should be accounted for as a sale and a leaseback. When
assessing control, a key factor to consider is whether the lessee has obtained legal title to the asset;
however, this factor is not necessarily determinative, as discussed in ASC 842-40-55-2.

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.

Excerpt from ASC 842-40-55-2

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.

Example 6-1 and Example 6-2 illustrate the assessment of whether a lessee has obtained control of the
underlying asset prior to lease commencement.

EXAMPLE 6-1
Sale and leaseback transaction – lessee obtains control prior to lease commencement

Contractor Corp wants to lease a new vehicle for five years. The vehicle manufacturer is not willing to
enter into lease arrangements, so Contractor Corp identifies a bank that is willing to purchase the
vehicle and enter into a lease under an agreement that Contractor Corp expects to classify as an
operating lease.

Contractor Corp purchases the vehicle from the manufacturer, takes possession and obtains legal title.
Shortly thereafter, Contractor Corp sells the vehicle to the bank. The sale agreement requires the bank
to reimburse Contractor Corp for all costs incurred to acquire the vehicle from the manufacturer and
provides the bank with legal title to the vehicle. Concurrent with the sale, Contractor Corp and the
bank enter into a five-year lease of the vehicle.

Should Contractor Corp account for the transaction as a sale and leaseback?

Analysis

Because Contractor Corp purchased the vehicle from the manufacturer, obtained legal title, accepted
the asset, had physical possession of the asset, and had the significant risks and rewards of ownership,

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