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Sale and leaseback transactions

the expected carrying value of the asset. In this example, an imputed interest rate of approximately
11.93% is required.

The financing method based on the imputed interest rate of 11.93% is illustrated below:

Net carrying Accumulated Financial Reduction of Interest
Period amount Asset value depreciation liability liability expense
Inception $800,000 $1,200,000 $400,000 $950,000 $ – $ –

Year 1 720,000 1,200,000 480,000 863,297 86,703 113,297
Year 2 640,000 1,200,000 560,000 766,255 97,043 102,957
Year 3 560,000 1,200,000 640,000 657,638 108,618 91,384
Year 4 480,000 1,200,000 720,000 536,069 121,570 78,430

Year 5 400,000 1,200,000 800,000 400,000 136,068 63,932

Since the financial liability and net carrying amount of the asset are equal on the date the buyer-lessor
obtains control, the seller-lessee would recognize the sale of the building with no gain or loss.

EXAMPLE 6-14

Failed sale and leaseback – seller-lessee sells asset and buyer-lessor obtains control of the underlying
asset prior to the end of the leaseback term

Assume the same fact pattern as Example 6-11 except that the lease contract is modified at the end of
the third year to remove the seller-lessee’s repurchase option. As a result, the buyer-lessor obtains
control of the asset at the end of the third year.

How should the seller-lessee account for the sale and leaseback of the building?

Analysis

At the end of the third year, the buyer-lessor obtains control of the asset. At that time, the seller-lessee
would recognize the sale of the asset and any gain that resulted from removing the underlying asset
and financial liability from its books.

Application of the financing method for this scenario is illustrated below:

Net carrying Accumulated Financial Reduction of Interest
Period amount Asset value depreciation liability liability expense
Inception $800,000 $1,200,000 $400,000 $950,000 $ – $ –
Year 1 720,000 1,200,000 480,000 938,350 11,650 88,350
Year 2 640,000 1,200,000 560,000 925,617 12,733 87,267

Year 3 560,000 1,200,000 640,000 911,699 13,918 86,082

At the end of the third year when the repurchase option is removed, the seller-lessee would assess the
classification of the lease. If classified as an operating lease, the seller-lessee would remove the
financial liability and asset from its books and recognize a gain of $351,699 ($911,699 financial

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