Page 220 - pwc-lease-accounting-guide_Neat

Sale and leaseback transactions

standard, sale recognition is precluded when the party that would be the seller-lessee has a substantive
repurchase option or obligation with respect to the underlying asset. If so, the buyer-lessor has not
obtained control. A non-substantive repurchase option does not preclude sale accounting. See RR 8.7
for additional guidance on repurchase rights.

Excerpt from ASC 606-10-55-68

If an entity has an obligation or a right to repurchase the asset (a forward or a call option), a customer
does not obtain control of the asset because the customer is limited in its ability to direct the use of,
and obtain substantially all of the remaining benefits from, the asset even though the customer may
have physical possession of the asset.

Despite the prohibition in the revenue guidance, the existence of a repurchase option does not always
preclude recognition of a sale in a sale and leaseback arrangement. ASC 842-40-25-3 provides specific
guidance on evaluating a repurchase option in a sale and leaseback transaction. A repurchase option
does not preclude sale and leaseback accounting if both of the following criteria are met.

□ The repurchase option is exercisable by the seller-lessee only at the then-prevailing fair value of
the asset

□ Alternative assets are readily available in the marketplace, which are substantially the same as the
underlying asset

If the underlying asset is real estate or integral equipment as defined in ASC 978 (i.e., any physical
structure or equipment attached to the real estate that cannot be removed and used separately without
incurring significant cost), the transaction would fail to meet the second criteria regardless of the
exercise price of the repurchase option because each location is unique; therefore, alternative real
estate assets or integral equipment that are readily available in the marketplace will not be considered
substantially the same as the underlying real estate asset or integral equipment.

Judgment may be required to determine whether other types of non-real estate assets are considered
substantially the same as the underlying asset. Generally, if alternative assets are readily available in
the marketplace, which are substantially the same as the underlying asset, the seller-lessee would be
indifferent as to whether it (1) repurchased the asset it previously sold and leased back, or (2)
purchased another asset that is substantially the same in the marketplace. Accordingly, we believe the
less generic the underlying asset, the more difficult it would be to assert that alternative assets readily
available in the marketplace are substantially the same as the underlying asset.

Arrangements with a fixed price repurchase option d0 not qualify as a sale because the exercise price
will not necessarily reflect the then-prevailing fair value of the asset. If an arrangement has fixed price
renewal options that extend to substantially all of the economic life of the asset, the entity may need to
evaluate whether the fixed price renewals are economically similar to a repurchase option that would
preclude sale accounting. As this concept is not addressed by ASC 842, a number of views have
evolved. One view is that a renewal option is fundamentally not the same as a repurchase option and
would therefore not preclude sale accounting. Another view is that a fixed price renewal option that
extends to substantially all of the economic life of the asset is equivalent to a purchase option that
would preclude sale accounting. We believe a reasonable approach is to determine whether the present
value of the fixed price renewal options approximates the expected fair value of the underlying asset at
the beginning of the renewal period. If it does, we believe control has not transferred because the fixed

6-13