Page 251 - pwc-lease-accounting-guide_Neat

Other topics

Excerpt from ASC 842-20-40-3

If the nature of a sublease is such that the original lessee is relieved of the primary obligation under
the original lease, the transaction shall be considered a termination of the original lease. … Any
consideration paid or received upon termination that was not already included in the lease payments
(for example, a termination payment that was not included in the lease payments based on the lease
term) shall be included in the determination of profit or loss to be recognized in accordance with
paragraph 842-20-40-1. If a sublease is a termination of the original lease and the original lessee is
secondarily liable, the guarantee obligation shall be recognized by the lessee in accordance with
paragraph 405-20-40-2.

See LG 5.5 for more details regarding termination of a lease.

8.2.2 Accounting by the head lessor

As described in ASC 842-30-35-7, a head lessor should continue to account for a lease that an
intermediate lessor has subleased, sold, or transferred as it did before such transaction. However, if
the lease is replaced by a new agreement with a new lessee, the head lessor should account for the
change in lessee as a termination of the original lease and the commencement of a new lease. See LG
5.5 for more details regarding termination of a lease.

8.3 Sale of leased assets

A reporting entity may lease an asset in which it owns an interest (e.g., the lessee owns an interest in a
partnership that owns the underlying asset). If the reporting entity sells its interest in the leased asset
(e.g., sells its interest in the partnership that owns the underlying asset), but continues to lease the
asset, the accounting treatment depends on whether the lease is modified in connection with the sale,
as discussed in ASC 842-40-55-9.

□ If the preexisting lease is modified in connection with the sale, the seller-lessee should account for
the transaction in accordance with the sale and leaseback guidance. See LG 6 for information on
sale and leaseback transactions.

□ If the preexisting lease is not modified in connection with the sale, then the seller-lessee should
account for the sale using other GAAP.

While the guidance in ASC 842-40-55-8 refers to a circumstance in which the reporting entity acquires
its ownership interest and enters into the lease at or near the same time, we believe this guidance
should be applied regardless of the length of time between the acquisition date of the ownership
interest and the lease.

A sale or spinoff of a subsidiary that leases the property to its parent is a sale and leaseback whether
the intercompany lease is modified or not. See LG 6 for information on sale and leaseback
transactions.

ASC 842-40-55 provides additional guidance for when arrangements involve leases between parties
under common control.

8-5