Page 228 - pwc-lease-accounting-guide_Neat

Sale and leaseback transactions

Analysis

The seller-lessee sold the building for $30 million, which is greater than its fair value of $28 million.
The difference should be recorded by the seller-lessee as additional financing from the buyer-lessor
separate from the lease liability.

The right-of-use asset is equal to the lease liability. The lease liability is $5,360,087, calculated as the
present value of the contractual lease payments of $10 million at 6% ($7,360,087), less the $2 million
off-market adjustment. The financial liability is equal to the difference between the sales price and the
fair value of $2 million. The gain on sale is the difference between the sale price ($30 million) and
carrying value ($20 million), less the off-market adjustment of $2 million.

The seller-lessee should record the following journal entry to record this transaction.

Dr. Cash $30,000,000
Dr. Right-of-use asset $5,360,087
Cr. Building $20,000,000
Cr. Lease liability $5,360,087
Cr. Financial liability $2,000,000
Cr. Gain on sale $8,000,000

Each annual rental payment of $1,000,000 would be allocated pro rata between the lease liability and
the financial liability. The amount allocated to the financial liability would be $271,736 ($1,000,000 ×
[$2,000,000/$7,360,087]). The remaining $728,264 of the total rental payment would be allocated to
the lease. The seller-lessee will recognize $728,264 as lease expense each year of the leaseback. The
$271,736 represents payment of the financial liability and interest expense. Interest expense is
calculated as $120,000 in year 1, declining to $15,381 in year 10 based on an amortization schedule
using the 6% incremental borrowing rate.

See LG 4.4.2 for information on operating lease expense recognition.

6.4.4.2 Buyer-lessor accounting for a transaction with off-market terms

The buyer-lessor may purchase an asset for an amount that is different from the fair value of the asset.
If the sales proceeds (i.e. purchase price) are less than the fair value of the asset, the difference should
be recognized as prepaid rent. If the sales proceeds are higher than the fair value of the asset, the
excess should be considered a loan to the lessee.

Sale price or leaseback payments are less than fair value

The stated sale price of an underlying asset may be less than its fair value, or the present value of the
contractual leaseback payments may be less than the present value of market rental payments. A
buyer-lessor should account for such a difference as a prepayment of rent by the seller-lessee, which
should be recognized as lease income along with the contractual leaseback payments. See LG 4.2.2.1
for details on the accounting for the prepayment of rent. The buyer-lessor should record the
underlying asset at its fair value.

6-21