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Effective date and transition

Question 10-16

Must lessors apply sale and leaseback transition guidance under the leases standard to failed sale and
leaseback transactions under ASC 840 that existed prior to the effective date of the leases standard?

PwC response
We do not believe that a buyer-lessor should reassess a successful purchase under the new standard.

The transition provisions require that transactions that “failed” sale-leaseback accounting under ASC
840 through the effective date be reassessed under the leases standard to determine if they would
qualify as a sale during the look-back period. Since the sale-leaseback model under ASC 840 did not
apply to lessors, but the sale and leaseback model in the leases standard does, it is unclear whether the
transition guidance in the leases standard for previous failed sale and leaseback transactions applies to
lessor accounting.

We believe a buyer-lessor should not reassess a successful purchase with respect to a previous sale and
leaseback transaction that did not qualify for sale-leaseback accounting under ASC 840. Instead, for
successful purchases, buyer-lessors should account for the leaseback in accordance with the normal
lessor transition guidance.

Question 10-17

Must lessees apply sale and leaseback transition guidance under the leases standard to failed sale and
leaseback transactions under ASC 840 that existed prior to the effective date of the leases standard
when these transactions resulted from failed build-to-suit transactions under ASC 840?

PwC response
Under ASC 840 and the leases standard, a lessee that is deemed to be the owner of a construction
project due to a failed build-to-suit transaction must evaluate the transaction upon construction
completion to determine if it qualifies for sale-leaseback accounting.

The transition guidance in the leases standard does not explicitly address the transition for a
transaction that failed the sale and leaseback guidance under ASC 840 once construction was
completed (either prior to or during the look-back period) because the transaction failed the build-to-
suit guidance under ASC 840. We believe that in such instances, since the reason for the failed sale-
leaseback was due to a failed build-to-suit under ASC 840, the lessee should apply the transition
guidance applicable to the failed build-to-suit (i.e., the lessee would not have to apply the sale and
leaseback transition guidance for a failed sale and leaseback transaction). Instead, the lessee would
derecognize the assets and liabilities recorded and record any difference as an adjustment to equity (1)
at the later of the beginning of the look-back period and the date the lessee was determined to be the
accounting owner under ASC 840, if a reporting entity chooses to adjust comparative periods, or (2) at
the effective date, if the entity chooses not adjust comparative periods. After such date, the lessee
would follow the lessee transition requirements for the lease.

We believe that the lessee should determine lease classification as of lease inception using the terms
and conditions of the lease at that time, in accordance with ASC 840’s lease classification guidance.
Alternatively, the lessee could determine lease classification, in accordance with ASC 842, as of the
lease commencement date.

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