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Sale and leaseback transactions

Accordingly, Law Firm should recognize such costs as prepaid rent. See LG 4.2.2 for information on
the accounting for prepaid rent.

Law Firm should account for the $100,000 of construction costs incurred as lessee assets (i.e.,
leasehold improvements) that would be depreciated over the shorter of their useful lives or the lease
term.

6.3.4 Impact of lease classification on qualification as a sale

In evaluating a potential sale and leaseback, whether a sale has occurred can be impacted by the
classification of the lease. If a leaseback is classified as a finance lease (seller-lessee) or a sales-type
lease (buyer-lessor), then no sale has occurred and the transaction should be accounted for as a failed
sale and leaseback. This is because a finance lease is effectively a purchase of an asset and a sales-type
lease is effectively a sale of an asset, not a lease. Accordingly, the transaction would result in the seller-
lessee effectively transferring control of the asset to the buyer-lessor (i.e., a sale) and immediately
reacquiring control (i.e., a purchase). See LG 3 for information on lease classification. See LG 6.5 for
information on the accounting for failed sale and leaseback transactions.

6.3.5 Repurchase rights and obligations in a sale and leaseback transaction

A repurchase right gives the seller-lessee the right (or obligation) to repurchase the asset after it has
been sold to the buyer-lessor. There are three forms of repurchase rights.

□ A seller-lessee’s obligation to repurchase and the buyer-lessor’s obligation to sell the asset (a
forward)

□ A seller-lessee’s right to repurchase the asset (a call option)

□ A buyer-lessor’s right to require the seller-lessee to repurchase the asset (a put option)

An arrangement to repurchase the asset that is negotiated between the buyer-lessor and seller-lessee
after control of the asset has been transferred to the buyer-lessor is not a repurchase agreement
because the buyer-lessor is not obligated to resell the asset as part of the initial transaction. The
subsequent decision to repurchase the asset does not affect the buyer-lessor’s ability to direct the use
of or obtain the benefits of the asset. See RR 8.7 for additional guidance on repurchase rights.
Additional consideration should be given to the substance of the arrangement. If the substance of the
arrangement suggests that the repurchase agreement was contemplated as part of the initial sales
transaction, it may be considered a repurchase right and should be evaluated accordingly.

As discussed in RR 8.7, certain sale transactions that contain a put or call option that cannot be
recognized as sales are accounted for as leases to the customer. However, if such a failed sale is
accompanied by a leaseback, it should be accounted for as a financing arrangement because the seller
retains the right to use the asset. See LG 6.5 for further information on how to account for a failed sale
and leaseback transaction.

6.3.5.1 Seller-lessee has a repurchase option or the transaction is subject to a forward

The guidance for repurchase rights in the revenue standard should be applied to sale and leaseback
transactions with certain clarifications unique to sale and leaseback transactions. In the revenue

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