A very interesting by-product of the new revenue recognition standard (ASU 2014-09, Revenue from Contracts with Customers – Topic 606) issued on May 28, 2014 and the new lease standard (ASU 2016-02, Leases – Topic 842) issued on February 25, 2016 will be a change in accounting for sale-leaseback transactions, which is a popular tool for financing real estate and equipment. Topics Leases. Under previous lease accounting rules, a sale leaseback transaction may have generated a deferred gain to be recorded as an offset to future rent expense. Therefore, if the sale meets the criteria in ASC 606 to be recognized as revenue to the seller, the buyer lessor will account for the lease in accordance with ASC 842. Copyright 2000-2020 LeaseAccelerator, Inc. All rights reserved. Under ASC 842 lessors will classify leases as sales-type — direct financing or operating. 3. Nobody wants more debt on their balance sheet. Unless the current tax rules change, a similar issue arises when considering the tax effect of certain sale leasebacks. If the seller-lessee has an option to renew the lease, these optional renewal periods must be included in the lease term if the lessee is “reasonably certain” to exercise them. One of the areas impacted by the new standard is the accounting for sale and leaseback transactions and, as you’ll see, the guidance under ASC 842 is a lot different from ASC 840! GAAP Dynamics is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. However, these off-market adjustments might cause a lease, which otherwise is an operating lease, to be classified as a finance lease. As such, entities that continue to have leveraged leases must continue to provide disclosures as required by ASC 842-50, which carries forward existing guidance from ASC 840. Let’s talk!  | Tags: Accounting. Posted on Feb 04, 2020 by 151 Le Gordon Drive, Suite 101 Another indicator is that the significant risks and rewards of owning the asset have transferred from the seller-lessee to the buyer-lessor. In a sale-leaseback transaction, new guidance requires that both the seller-lessee and buyer-lessor evaluate whether a sale in fact occurred from an accounting perspective. This means it is accurate, relevant, engaging, visually appealing, and fun. © 2020 GAAP Dynamics All Rights Reserved. The disclosure requirements for lessees include both qualitative and quantitative elements specifically: 1. Early adoption is permitted. Your #1 Resource for Lease Accounting News & Information, An Analysis of the New Sale and Leaseback Guidance. Case 3. ASC 842 makes significant changes to how a lessee would determine whether its involvement in the construction of the asset is subject to sale and leaseback accounting. These new requirements may impact how the lessor and lessee account for the underlying asset on the balance sheet. The pattern of expense recognition in the income statement will depend on a lease’s classification. Generally, such put options do not preclude sale accounting. In this article, GAAP dynamics covers the changes in sale and leaseback accounting from ASC 840 to ASC 842… Nonpublic dual reporters may decide to adopt both ASC 842 and IFRS 16 on the same date. ASC 842-40 specifies the accounting for sale and leaseback transactions where an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and leases that asset back from the buyer-lessor. It is hosted by GAAP Dynamics. ASC 842-40-55-21 states “a significant residual value guarantee by the seller-lessee may affect an entity’s consideration of the transfer of control.” Residual value guarantees may also impact the lease classification. The new lease standard is expected to increase the total assets and total liabilities of publicly traded companies by some $1.5 trillion each, of which $1.1 trillion would come from capitalizing existing off–balance sheet real estate leases… The scope of ASC 842 is substantially the same as ASC 840. ASC 842 requires entities to make adjustments for off-market terms so that the sale is recorded at fair value. Further when the transaction was a failed sale and leaseback under ASC 840 but would qualify as a sale under ASC 842’s sale and leaseback guidance during the comparative periods, the seller-lessee is required to consider ASC 840 to apply the transition provisions in ASC 842 … In this case, the transaction does not qualify as a sale and leaseback… While ASC 842 retains the two-model approach to classifying leases as operating or finance, most leases must now be recorded on the balance sheet. ASC 842 expands the failed sale-leaseback concept to include equipment. Shawn Halladay outlines the key issues and accounting requirements surrounding this product as well as strategies to overcome potential obstacles. As such, entities that continue to have leveraged leases must continue to provide disclosures as required by ASC 842-50, which carries forward existing guidance from ASC 840. Douglas Sayad, CPA, and William Watts ... An example of when a cumulative effect retained earnings adjustment might be required is if a sale-leaseback gain was deferred under Topic 840 but qualifies for recognition under Topic 842. Sale-Leaseback Transactions under ASC 842. Our clients include some of the largest accounting firms and companies in the world. In February 2016, the Financial Accounting Standards Board (“FASB” or “the Board”) issued its highly-anticipated leasing standard in ASU 2016-02 (“ASC 842” or “the new standard”) for both lessees and lessors. 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