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ASC 805-20-30-25

For leases in which the acquiree is a lessor of a sales-type lease or a direct financing lease, the acquirer
shall measure its net investment in the lease as the sum of both of the following (which will equal the
fair value of the underlying asset at the acquisition date):

a. The lease receivable at the present value, discounted using the rate implicit in the lease, of the
following, as if the acquired lease were a new lease at the acquisition date:

1. The remaining lease payments

2. The amount the lessor expects to derive from the underlying asset following the end of the
lease term that is guaranteed by the lessee or any other third party unrelated to the lessor.

b. The unguaranteed residual asset as the difference between the fair value of the underlying asset at
the acquisition date and the carrying amount of the lease receivable, as determined in accordance
with (a), at that date.

The acquirer shall take into account the terms and conditions of the lease in calculating the
acquisition-date fair value of an underlying asset that is subject to a sales-type lease or a direct
financing lease by the acquiree-lessor.

A customer relationship intangible or other nonlease-related assets associated with the lease may also
be recognized.

When the acquiree in a business combination is a lessor in a lease classified as an operating lease, the
underlying asset would be recognized and measured at fair value unencumbered by the related lease.
In other words, the leased property (including any acquired tenant improvements) would be measured
at the same amount, regardless of whether an operating lease is in place. An intangible asset or
liability may also be recognized if the lease contract terms are favorable or unfavorable as compared to
market terms. In addition, in certain circumstances, an intangible asset may be recognized at the
acquisition date for the value associated with the existing lease (referred to as an “in-place” lease) and
for any value associated with the relationship the lessor has with the lessee. Further, a liability may be
recognized for any unfavorable renewal options or unfavorable written purchase options if the exercise
is beyond the control of the lessor. See BCG 4.3.3.7 for more information.

8.7 Sales-type lease for a failed sale with a repurchase
option

A transaction to sell an asset may not meet the definition of a sale in ASC 606 if the seller fails to
transfer control. This may happen when there is a call option to repurchase the asset for an amount
that is less than its original selling price. In this circumstance, ASC 606-10-55-68 requires the seller to
account for the arrangement as a lease in accordance with ASC 842 rather than a sale.

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