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Sale and leaseback transactions

6.5 Transaction is not accounted for as a sale (failed sale

and leaseback)

When a sale and leaseback transaction does not qualify for sale accounting, the transaction must be
accounted for as a financing transaction by the seller-lessee and a lending transaction by the buyer-
lessor, as discussed in ASC 842-40-25-5.

ASC 842-40-25-5
If the transfer of the asset is not a sale in accordance with paragraphs 842-40-25-1 through 25-3, both
of the following apply:
a. The seller-lessee shall not derecognize the transferred asset and shall account for any amounts
received as a financial liability in accordance with other Topics.
b. The buyer-lessor shall not recognize the transferred asset and shall account for the amounts paid
as a receivable in accordance with other Topics.

6.5.1 Accounting for a failed sale and leaseback by a seller-lessee

To account for a failed sale and leaseback transaction as a financing arrangement, the seller-lessee
does not derecognize the underlying asset; the seller-lessee continues depreciating the asset as if it was
the legal owner. The sales proceeds received from the buyer-lessor should be recognized as a financial
liability.

6.5.1.1 Allocation of the leaseback payments by a seller-lessee

A seller-lessee will make rental payments under the leaseback. These payments should be allocated
between interest expense and principal repayment of the financial liability. To determine the amount
allocated to interest expense, the seller-lessee should use its incremental borrowing rate. However, a
seller-lessee may need to adjust the interest rate initially or during the course of the leaseback, as
discussed in ASC 842-40-30-6.

ASC 842-40-30-6
The guidance in paragraph 842-40-25-5 notwithstanding, the seller-lessee shall adjust the interest
rate on its financial liability as necessary to ensure that both of the following apply:

a. Interest on the financial liability is not greater than the principal payments on the financial
liability over the shorter of the lease term and the term of the financing. The term of the financing
may be shorter than the lease term because the transfer of an asset that does not qualify as a sale
initially may qualify as a sale at a point in time before the end of the lease term.

b. The carrying amount of the asset does not exceed the carrying amount of the financial liability at
the earlier of the end of the lease term or the date at which control of the asset will transfer to the
buyer-lessor (for example, the dates at which a repurchase option expires if that date is earlier
than the end of the lease term).

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