Page 225 - pwc-lease-accounting-guide_Neat

Sale and leaseback transactions

6.4.4 Accounting for sale and leaseback transactions entered into at off-market terms

Sale and leaseback transactions entered into at off-market terms should be adjusted so that the sale is
recorded at fair value. A reporting entity should determine whether the sale and leaseback is an off-
market transaction by considering either of the following, whichever is more readily determinable:

□ The sale price compared to the fair value of the underlying asset

□ The present value of the contractual lease payments compared to the present value of fair market
value lease payments

The use of observable prices and observable information should be maximized when making this
assessment. For example, if comparable sales of assets similar to an underlying asset exist, an
observable fair value for the underlying asset can be determined at the time of the transaction. The
observable fair value should be used to determine the gain or loss and any related adjustment, rather
than basing an adjustment on an estimate of market rental rates if comparable rental rates are not
readily available.

If part of the consideration includes amounts related to the settlement of preexisting contracts or other
arrangements, those other arrangements should be considered before determining whether the
transaction was entered into at off-market terms. Similarly, if the sales proceeds or lease payments
include variable amounts (e.g., contingent consideration), the variable amounts should be estimated
and included in the evaluation.

When the sale of an asset is not at fair value or the lease payments are not at market rates, the seller-
lessee and buyer-lessor should make adjustments so that the sale is recognized at fair value, as
discussed in ASC 842-40-30-2.

ASC 842-40-30-2
If the sale and leaseback transaction is not at fair value, the entity shall adjust the sale price of the
asset on the same basis the entity used to determine that the transaction was not at fair value in
accordance with paragraph 842-40-30-1. The entity shall account for both of the following:

a. Any increase to the sale price of the asset as a prepayment of rent

b. Any reduction of the sale price of the asset as additional financing provided by the buyer-lessor to
the seller-lessee. The seller-lessee and the buyer-lessor shall account for the additional financing
in accordance with other Topics.

As discussed in ASC 842-40-30-4, if a sale and leaseback transaction is between related parties, the
adjustments required by ASC 842-40-30-2 should not be made; however, the lessee and lessor should
disclose the related party transaction in accordance with ASC 850, Related Party Disclosures.

6.4.4.1 Seller-lessee accounting for a transaction with off-market terms

A seller-lessee may sell an asset for an amount that is different than the fair value of the asset. If the
sales proceeds are less than the fair value of the asset, the difference should be recognized as prepaid

6-18