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Sale and leaseback transactions

It may be difficult to apply the imputed revenue model, previously described, when the asset involved
in the sale and leaseback transaction is not fully utilized at the transaction date. When applying the
imputed revenue model, a seller-lessee should consider the amount of asset usage and time necessary
to lease vacancies. If the buyer-lessor is expected to lease the asset to third parties, we believe it is
acceptable for the seller-lessee to impute rental income based on rents due from actual tenants;
however, it may be difficult for the seller-lessee to apply this approach as it is no longer the legal owner
of the asset and may not have access to the necessary information. Accordingly, we also believe it is
acceptable for the seller-lessee to impute estimated market rental income as if the buyer-lessor is
leasing all of the other stores from the seller-lessee (and subletting the stores to other tenants).
However, the specific facts and circumstances, including the expected time necessary to lease the
vacant space, should be considered when applying this alternative approach. For example, if 20% of
the stores in the strip shopping center were vacant at the time of the sale and leaseback transaction
and it typically requires several months to lease vacant space, it would be inappropriate to assume that
the buyer-lessor was immediately leasing 100% of such vacant space from the seller-lessee at a market
rental rate.

6.5.2 Accounting for a failed sale and leaseback by a buyer-lessor

To account for a failed sale and leaseback transaction as a financing arrangement, the buyer-lessor
records the initial payment to the seller-lessee as a financial asset (i.e., a loan receivable).

As the seller-lessee makes rental payments, the buyer-lessor should allocate the payments between
interest income and principal repayments on the financial asset.

To determine the amount allocated to interest income, the buyer-lessor should utilize an interest rate
based on the guidance in ASC 835, Interest, specifically, ASC 835-30-25-12 through 25-13.
Accordingly, the buyer-lessor’s interest rate may not be the same as the seller-lessee’s rate, particularly
when the seller-lessee has adjusted its interest rate to avoid negative amortization or a built-in-loss.

6.5.2.1 Accounting by the buyer-lessor when it obtains control of the asset

A buyer-lessor may obtain control of the asset at any time, including at the end of the leaseback period.
If a sale is ultimately recognized in a failed sale and leaseback transaction, the remaining balance of
the financial asset represents the cost of the underlying asset that the buyer-lessor purchases.

Example 6-16 and Example 6-17 illustrate the accounting for a failed sale and leaseback by the buyer-
lessor, including the accounting by the buyer-lessor when control is obtained.

EXAMPLE 6-16

Failed sale and leaseback – buyer-lessor obtains control of the underlying asset at the end of the
leaseback term

Assume the same fact pattern as Example 6-11. In addition, the buyer-lessor’s interest rate implicit in
the leaseback is 9%.

How should the buyer-lessor account for the sale and leaseback of the building?

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