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Sale and leaseback transactions

6.3.5.3 Seller-lessee has a right of first offer

Some sale-leaseback agreements may provide the seller-lessee with a "right of first offer," which allows
the seller-lessee to make an offer to purchase the underlying asset at the end of the lease term based
on a current valuation of the asset before the buyer-lessor may solicit offers from third parties. We
believe that a sale-leaseback agreement containing a right of first offer should be carefully analyzed to
determine whether the buyer-lessor is economically or contractually compelled to accept the offer. For
example, a buyer-lessor may conclude it is (1) economically compelled if it is required to pay a
substantive penalty if it does not accept the offer or (2) contractually compelled to accept the offer per
the terms of the lease agreement.

If the buyer-lessor is not compelled to accept the seller-lessee’s offer, the right of first offer would
typically not prevent sale accounting. If the buyer-lessor is compelled to accept the offer, the right of
first offer is effectively a repurchase option held by the seller-lessee, which may, prevent the
transaction from qualifying as a sale. See LG 6.3.5.1 for more information on the evaluation of a seller-
lessee repurchase option.

A right of first offer may also economically or contractually compel the seller-lessee to make an offer to
acquire the underlying asset. If the seller-lessee is compelled to make an offer, the right of first offer is
effectively a buyer-lessor put option. See LG 6.3.5.2 for more information on the evaluation of a buyer-
lessor put option.
6.4 When the transaction qualifies as a sale

If the buyer-lessor obtains control of the asset, the sale (by the seller-lessee) or purchase (by the buyer-
lessor) and the leaseback should be accounted for separately, with the lease being accounted for in
accordance with ASC 842.

ASC 842-40-25-4
If the transfer of the asset is a sale in accordance with paragraphs 842-40-25-1 through 25-3, both of
the following apply:
a. The seller-lessee shall:
1. Recognize the transaction price for the sale at the point in time the buyer-lessor obtains
control of the asset in accordance with paragraph 606-10-25-30 in accordance with the
guidance on determining the transaction price in paragraphs 606-10-32-2 through 32-27

2. Derecognize the carrying amount of the underlying asset

3. Account for the lease in accordance with Subtopic 842-20.

b. The buyer-lessor shall account for the purchase in accordance with other Topics and for the lease
in accordance with Subtopic 842-30.

The accounting considerations for the purchase and sale transaction, as well as the leaseback, are
discussed in the following section.

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