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Sale and leaseback transactions

6.4.2 Accounting by the buyer-lessor

To determine the appropriate accounting treatment, a buyer-lessor should determine if the transaction
meets the definition of a business combination under ASC 805, Business Combinations, or if the
transaction will be accounted for as an asset acquisition. The buyer-lessor should value the tangible
property independently from the terms of the leaseback and should value and account for the
leaseback in the same manner as any other lease. See LG 3 and LG 4 for guidance on lease
classification and the accounting for leases, respectively. See PwC’s Business combinations and
noncontrolling interests guide for information on accounting related to business combinations and
asset acquisitions.

6.4.3 Costs in a sale and leaseback transaction

The seller-lessee will incur costs in connection with a sale and leaseback transaction. Transaction costs
that the seller-lessee would have had to pay to a third party if the asset were sold outright (e.g., absent
a leaseback) should be accounted for as part of the sale transaction. These seller expenses reduce the
gain (or increase the loss) on the sale. Any additional costs due to the leaseback should be evaluated to
determine if they should be deferred as initial direct costs. See LG 4.2.2.2 for information about the
evaluation of initial direct costs.

In some cases, the seller-lessee may be required to pay costs incurred by the buyer-lessor in
connection with purchasing the asset, financing the acquisition of the asset, or entering into the sale
and leaseback transaction. The seller-lessee will need to use judgment to determine if these costs
should be accounted for as a reduction of the sales price or as a cost associated with the leaseback.

Certain transactions may occur in which a seller-lessee sells an asset for an amount that is less than its
fair value. See Example 6-8. In this situation, the seller-lessee should apply the guidance for sale and
leaseback transactions entered into at off-market terms, as discussed in LG 6.4.4.

The buyer-lessor’s accounting for transaction costs depends on whether the transaction is considered a
business combination or an asset acquisition. If the transaction is considered a business combination,
transaction costs are expensed as incurred; if considered an asset acquisition, transaction costs are
capitalized. The buyer-lessor should defer any debt acquisition costs (e.g., costs relating to the
financing) and initial direct costs of entering into the lease (e.g., negotiating and arranging the lease).
See LG 4.3.1.2 for information on initial direct costs.

If a sale and leaseback transaction does not qualify for sale accounting, it is considered a failed sale
and leaseback and should be accounted for as a financing transaction. All transaction costs incurred by
the seller-lessee and buyer-lessor should be evaluated to determine if they should be accounted for as
debt issuance or debt origination costs, respectively. See FG 1.2.2 for information on debt issuance
costs. See LI 4.4 for information on debt origination fees and costs.

When debt origination costs are capitalized by a buyer-lessor in a failed sale and leaseback transaction
that subsequently qualifies as a sale, the buyer-lessor should record the underlying asset (e.g.,
property, plant, and equipment) or net investment in the lease at the carrying amount of the financial
asset (e.g., loan receivable) when the lease is classified as an operating lease or direct financing lease,
respectively. Regardless of the classification, the initial measurement of the asset recognized when the
buyer-lessor obtains control of the underlying asset (i.e., when the transaction qualifies as a sale)
should include any unamortized debt origination costs. See LG 6.5.2 for information on the accounting
for a failed sale and leaseback by a buyer-lessor.

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