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U.S. GAAP Codification of Accounting Standards
Codification Topic 840-40: Sale-Leaseback Transactions

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Codification Topic 840-40
Sale-Leaseback Transactions

Leases
SFAS 13, November 1976
"Accounting for Leases"

Sale-Leaseback
1. Entity A sell a property to Entity B
2. Entity B leases the property to Entity A
3. Entity A is the seller-lessee
4. Entity B is the purchaser-lessor

Classification of sale-leaseback by seller-lessee
1. Sale-capital-leaseback
2. Sale-operating-leaseback

Classification of sale-leaseback by purchaser-lessor
1. Purchase-direct-financing-leaseback
2. Purchase-operating-leaseback

Sale-capital-leaseback
1. The lease meets one of (A), (B), (C), (D)
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
--> in proportion to the amortization of the leased asset

Sale-operating-leaseback
1. The lease does not meets any of (A), (B), (C), (D)
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
--> in proportion to the rent expense charged over the lease term

Purchase-direct-financing-leaseback
1. The lease meets one of (A), (B), (C), (D) and both of (E), (F)
2. Record the purchase of property
3. Apply the accounting for a direct financing lease

Purchase-operating-leaseback
1. The lease does not meet the requirement for a direct financing lease
2. Record the purchase of property
3. Apply the accounting for an operating lease

Exceptions
Case 1. The seller-lessee leases only a minor portion
--> of the remaining use of the property

Case 2. The seller-lessee retains
--> more than a minor portion
--> but less than substantially all
--> of the remaining use of the property
and
--> gain on the sale > (2a) or (2b)
(2a) recorded amount of leased asset
(2b) present value of minimum lease payments

Case 3. Fair value of the property < undepreciated cost

Case 1
The sale and the leaseback are recorded
--> as "separate" transactions

Case 2
1. Sale-capital-leaseback
--> Gain on the sale - (2a) is
--> recognized at the time of sale

2. Sale-operating-leaseback
--> Gain on the sale - (2b) is
--> recognized at the time of sale

Case 3
A loss is recognized at the time of sale
--> up to the amount of (3a)
(3a) = undepreciated cost - fair value

Capital lease criteria
(A) Ownership transfer
--> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
--> Lease term ≥ 75% of economic life of the lease property
(D) Minimum lease payment: 90% rule
--> Present value of minimum lease payments > 90% of fair value of the lease property

Additional criteria for lessor
(E) Collectibility of minimum lease payment
--> reasonably predictable
(F) No important uncertainties
--> about the additional costs to be incurred by lessor
--> when such costs are not reimbursable

International Financial Reporting Standards (IFRS)

IAS 17: Leases

Codification Topic 840
Leases

Subtopics of Codification Topic 840

   840-10 Overall
   840-20 Operating leases
   840-30 Capital leases
   840-40 Sale-leaseback transactions

Accounting Terms of Codification Topic 840-10

   Bargain purchase option
   Bargain renewal option
   Capital lease
   Contingent rentals
   Direct financing lease
   Estimated economic life
   Estimated residual value
   Fair value of leased property
   Fiscal funding clause
   Heat supply (or burn-up) contracts
   Incremental borrowing rate
   Indirectly related to the leased property
   Interest rate implicit in the lease
   Lease
   Lease inception
   Lease term
   Leveraged lease
   Minimum lease payments
   Noncancelable lease term
   Operating lease
   Penalty
   Probable
   Reasonably possible
   Remote
   Sales-type lease
   Significant influence
   Sublease
   Substantially all

Accounting Terms of Codification Topic 840-20

Construction period lease payments
Original lessee

Accounting Terms of Codification Topic 840-30

   Advance refunding
   Delayed equity investment
   Interest method
   Nonrecourse financing

Accounting Terms of Codification Topic 840-40

   Active use of the property
   Minor
   Normal leaseback
   Profit or loss on sale
   Property improvements or integral equipment
   Sale-leaseback accounting
   Sale recognition
   Wrap lease transaction