Page 215 - pwc-lease-accounting-guide_Neat

Sale and leaseback transactions

c. The lessee legally owns either:

1. Both the land and the property improvements (for example, a building) that are under
construction

2. The non-real-estate asset (for example, a ship or an airplane) that is under construction.

d. The lessee controls the land that property improvements will be constructed upon (this includes
where the lessee enters into a transaction to transfer the land to the lessor, but the transfer does
not qualify as a sale in accordance with paragraphs 842-40-25-1 through 25-3) and does not enter
into a lease of the land before the beginning of construction that, together with renewal options,
permits the lessor or another unrelated third party to lease the land for substantially all of the
economic life of the property improvements.

e. The lessee is leasing the land that property improvements will be constructed upon, the term of
which, together with lessee renewal options, is for substantially all of the economic life of the
property improvements, and does not enter into a sublease of the land before the beginning of
construction that, together with renewal options, permits the lessor or another unrelated third
party to sublease the land for substantially all of the economic life of the property improvements.

The list of circumstances above in which a lessee controls an underlying asset that is under
construction before the commencement date is not all inclusive. There may be other circumstances
that individually or in combination demonstrate that a lessee controls an underlying asset that is
under construction before the commencement date.

There have been questions raised as to the meaning of “at any point during the construction period”.
Those questions focus on whether the provision requires the lessee to have the right to obtain the asset
either (1) at all times during the construction period (which could include contingent events that are
only triggered upon events within the lessee’s control) or (2) only based on some contingency or stated
event. We believe a lessee would be considered the owner of the asset during the construction period if
the lessee has the right to obtain the partially-constructed asset at some point during the construction
period (i.e., a call/purchase option). If the lessee does not have the right at all times, ownership of the
asset would be imputed at the point in time that the lessee has the right to obtain the partially-
constructed asset (e.g., when a purchase option becomes exercisable).

We believe a lessee’s call option that becomes exercisable solely due to the passage of time would cause
the lessee to have control of the partially-constructed asset immediately. If the option is contingent
upon any other event, and that event is within the lessor’s control or based on the occurrence of an
external event, control does not pass to the lessee until the contingency is resolved.

There may be circumstances in which the purchase option becomes exercisable only upon contingent
events occurring, such as when the lessee or the lessor is in default. In these cases, the lessee would
generally be considered to have the right to obtain the partially-constructed asset if the contingent
event were within the control of the lessee. All facts and circumstances should be considered carefully.
For example, a lease that provides a lessee the right to acquire the partially-constructed asset if the
lessee is in default may be considered within the control of the lessee. However, a lessee default under
the lease contract may result in economic consequences to the lessee, such as triggering cross defaults
in the lessee’s other arrangements. The right to acquire the partially-constructed asset in this
circumstance may not be considered substantive.

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