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Intermediate Accounting (Kieso)
Found in: Page 1239

Short Answer

What is the nature of a “sale-leaseback” transaction?

The purpose of the transaction is to raise money with a certain property given as security.

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Step by Step Solution

Meaning of sale-leaseback

The term "sell-leaseback" refers to an exchange in which the owner of an asset offers such an asset to another and quickly leases it back from the unused owner. The asset is sold at a price equal to or less than the current fair value and is rented back for the period of estimating the asset's valuable life for instalments of the lease, to reimburse the buyer, the money also paid by the buyer contributed a sensible return to speculation.

Explaining the nature of a “sale-leaseback” transaction

The goal of the transaction is to raise funds using a particular asset as collateral. For accounting reasons, the lessor must account for the sale-leaseback as a capital lease if the conditions are met, and the lessee should account for it as a purchase and as a direct-financing lease if the criteria are met.

Any revenue received by the seller-lessee from the sale of the leased asset must be deferred and amortized during the term of the lease (or economic life if any of the criteria are not met).

  1. A bargaining option is exercised in proportion to the amortization of the leased asset or
  2. There is a transfer of ownership at the conclusion of the lease. Damage should be reported as soon as possible. In addition, the marginal leaseback (rent with a present value of less than 10% of fair value) must be recorded as a sale recognizing the profit.

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