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Sale and leaseback transactions

price renewal options are economically similar to a repurchase option. However, if the present value of
the fixed price renewal options are less than the expected value of the underlying asset, the option
would not prevent the transfer of control.

If a repurchase option or obligation precludes a seller-lessee from accounting for the transaction as a
sale, both the seller-lessee and buyer-lessor should account for the contract as a financing
arrangement. See LG 6.5 for further discussion of how to account for a failed sale and leaseback
transaction.

6.3.5.2 Buyer-lessor has a put option

A put option allows a buyer-lessor to require the seller-lessee to repurchase the underlying asset at its
discretion. Generally, a put option indicates that the seller-lessee has relinquished control over the
asset. However, the revenue standard precludes sale accounting when a buyer-lessor has a significant
economic incentive to exercise a put option.

ASC 606-10-55-72

If an entity has an obligation to repurchase the asset at the customer’s request (a put option) at a price
that is lower than the original selling price of the asset, the entity should consider at contract inception
whether the customer has a significant economic incentive to exercise that right. The customer’s
exercising of that right results in the customer effectively paying the entity consideration for the right
to use a specified asset for a period of time. Therefore, if the customer has a significant economic
incentive to exercise that right, the entity should account for the agreement as a lease in accordance
with Topic 842 on leases unless the contract is part of a sale and leaseback transaction. If the contract
is part of a sale and leaseback transaction, the entity should account for the contract as a financing
arrangement and not as a sale and leaseback transaction in accordance with Subtopic 842-40.

The seller-lessee must assess the contract at inception to determine whether the buyer-lessor has a
significant economic incentive to exercise its put option. It should consider all relevant factors in its
assessment, including the following:

□ How the repurchase price compares to the expected market value of the asset at the date of
repurchase

□ The amount of time until the right expires

A buyer-lessor has a significant economic incentive to exercise a put option when the repurchase price
is expected to significantly exceed the market value of the asset at the time of repurchase. See RR 8.7
for additional information.

If it is determined that the buyer-lessor has a significant economic incentive to exercise a put option,
no sale has occurred and the sale and leaseback transaction should be accounted for as a financing
arrangement. If the buyer-lessor does not have a significant economic incentive to exercise a put
option, then sale accounting is not precluded. See LG 6.5 for further discussion of how to account for a
failed sale and leaseback transaction.

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