When a sale and leaseback transaction qualifies as a sale, the sale and leaseback components must be accounted for separately.

Accounting by the Seller-Lessee

1. Derecognition of the Asset and Recognition of Gain or Loss:
   • The seller-lessee removes the asset from their balance sheet.
   • A gain or loss is recognized based on the difference between the asset's carrying amount and the sale price.
2. Recognition of Leaseback Assets and Liabilities:
   • A right-of-use (ROU) asset and a corresponding lease liability are recognized.
   • As lease payments are made, the ROU asset and lease liability are reduced.

Accounting by the Buyer-Lessor

1. Asset Acquisition or Business Combination:
   • If the transaction meets the definition of a business combination, it is accounted for under ASC 805.
   • If not, the buyer-lessor records the asset as part of an asset acquisition.
2. Leaseback Accounting:
   • The leaseback is accounted for as a lease under ASC 842, similar to other leasing arrangements.

What if the Sale and Leaseback Transaction Fails?

A failed sale and leaseback transaction does not qualify as a sale under ASC 606. Instead, it is treated as a financing arrangement under ASC 842-40-25-5.

Accounting by the Seller-Lessee

1. No Derecognition of the Asset:
   • The seller-lessee retains the asset on their balance sheet and continues to depreciate it.
2. Recognition of Financial Liability:
   • Amounts received from the buyer-lessor are recorded as a financial liability under applicable accounting standards.
3. Leaseback Assets and Liabilities:
   • The seller-lessee still recognizes an ROU asset and lease liability and adjusts these as lease payments are made.

Accounting by the Buyer-Lessor

1. No Recognition of the Transferred Asset:
   • The buyer-lessor does not record the asset on their balance sheet.
2. Recognition of Receivable:
   • Amounts paid to the seller-lessee are recorded as a receivable under applicable accounting standards.
3. Leaseback Accounting:
   • The leaseback is treated as an operating or finance lease under ASC 842.

Key Considerations for Successful Accounting

1. Careful Evaluation of Sale Qualification:
   • Ensure compliance with ASC 606 criteria to determine whether a transaction qualifies as a sale.
   • Assess control transfer, contract terms, and lease classification.
2. Accurate Measurement and Recording:
   • For successful transactions, record ROU assets and lease liabilities accurately using present value calculations.
   • For failed transactions, maintain precise records of financial liabilities and receivables.
3. Professional Judgment:
   • Complex transactions require careful judgment, particularly when interpreting nuanced aspects of ASC 606 and ASC 842.

Accounting for sale and leaseback transactions requires a deep understanding of GAAP principles and their application. Whether the transaction qualifies as a sale or is treated as a financing arrangement, accurate accounting is essential to maintain compliance and transparency. By following the guidelines outlined in ASC 606 and ASC 842, both seller-lessees and buyer-lessors can ensure proper financial reporting while optimizing the benefits of sale and leaseback arrangements.

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