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Sale and leaseback transactions
A lessee should account for the underlying asset during the construction period similar to any other
asset under construction that it controls. For example, if a lessee determines that it controls an
underlying real estate asset under construction, the lessee should account for the real estate asset
under construction in accordance with ASC 360, Property, Plant, and Equipment. Any costs of
construction paid for by the lessor should be recognized by the lessee as a financial liability.
Similar to the lessee’s accounting, a lessor that has not obtained control of the underlying asset should
account for payments it makes during the construction period as a collateralized loan to the lessee in
accordance with ASC 310, Receivables. In other words, the accounting between the lessee and lessor
should be symmetrical. A lessor should not recognize the asset under construction.
A lessee and lessor should determine when, if ever, control transfers from the lessee to the lessor and
the transaction qualifies as a sale and a leaseback. Generally, once a lessee has obtained control of an
underlying asset under construction, it is unlikely that the transaction will qualify for sale and
leaseback accounting before construction of the underlying asset has been completed.
If the transaction otherwise meets the criteria to qualify for sale and leaseback accounting, as
discussed in LG 6.4, the lessee should recognize the sale of the asset when it transfers control of the
underlying asset to the lessor.
See LG 6.5 for additional information on the accounting for failed sale and leaseback transactions.
6.3.3.2 Accounting when lessee does not control the asset under construction
If a lessee does not obtain control of the underlying asset under construction, the transaction is not
subject to the sale and leaseback guidance. In those circumstances, the lessee should apply judgment
to determine how to account for costs it incurs during construction. Such costs, for example, may
relate to its own assets, such as leasehold improvements, or they may relate to the right to use the
lessor’s assets. If such costs relate to leasehold improvements, the lessee should generally account for
those costs in accordance with ASC 360. Payments made by the lessee for the right to use the asset
should be accounted for as lease payments under ASC 842, regardless of when the payments occur or
the form of such payments. For example, if the lessee pays for (or contributes) construction materials
to construct the lessor’s asset, such payments are included in lease payments.
Example 6-5 illustrates the application of this guidance.
EXAMPLE 6-5
Sale and leaseback transactions – construction costs incurred by a lessee that does not obtain control
of construction in process (real estate)
Assume the same fact pattern as Example 6-4.
How should Law Firm account for the costs incurred during the construction period?
Analysis
The $200,000 of construction cost overruns paid by Law Firm are lease payments because they were
required per the terms of the lease agreement in order for the lessee to obtain the right to use the
underlying asset and do not represent payment for a good or service provided to Law Firm.
6-11
