FINANCIAL WATCH By Rodney Hurd and Mindy Berman Sea Change Coming in the Accounting for Sale-Leaseback Transactions T on many common equipment leases and greatly affect lessee and lessor accounting in many instances. The repercussions of these changes are expected to significantly influence and alter commercial transactions, creating a sea change likely to color the next generation of lease activity. Furthermore, disparities between U.S. GAAP and IFRS on sale-leasebacks will continue to persist, although in slightly new forms than current standards. The FASB and IASB concluded their deliberations on sale-leaseback accounting, leading up to issuance of a final Leases standard later in 2015. From a big-picture perspec-tive, the proposed accounting for lessees would revert to the accounting set forth in the original SFAS 13, while, for les-sors for the first time, a failed sale-leaseback would end up accounted for as a financing outside the scope of the Leases standard. Like the originally issued SFAS 13, the proposed accounting would not distinguish between types of underly-ing assets, like equipment and real estate. HE PROPOSED ACCOUNTING for sale and leaseback arrangements by the FASB and the IASB will have a dramatic impact A Deeper Dive Sale-leasebacks under the new Leases standard will begin with application of the provisions for sale recognition under the recently issued Revenue Recognition standard. In appli-cation, the Boards affirmed that the presence of a leaseback does not, in and of itself, preclude sale treatment unless (1) the leaseback is classified as Type A (the working name for leases similar to capital leases under current GAAP, as op-posed to Type B leases, which are representative of current operating leases and limited largely to real estate leases in the future) assessed from the seller-lessee’s perspective or (2) the leaseback contains a “substantive” repurchase op-tion. The FASB decided that a fixed price purchase option is “substantive,” while a repurchase option exercisable only at the then-prevailing fair market value is not substantive, provided that the underlying asset is nonspecialized and readily available in the marketplace. The FASB is expected to provide explicit application guidance on “nonspecialized” assets, whereas the IASB has expressly said it will not. The FASB’s application guidance would appear to preclude sale treatment where the under-lying asset is real estate, equipment with significant cus-tomization, or standard model equipment where a second-ary market has not yet been established (e.g., breakthrough technology such as solar battery units, equipment for use in recycling commodities or cutting edge medical equipment). Lessee Perspective. Under the proposed FASB standard, when a sale occurs concurrently with a leaseback transaction, the les-see would account for the sale on the same basis as a similar sale not involving a leaseback and account for the leaseback in the same manner as any other lease. All gain on sale would be rec-ognized immediately. If features of the arrangement, however, preclude sale treatment (i.e., a failed sale-leaseback), the lessee would account for the transaction as a financing, meaning it would report the sales proceeds as a liability, keep the underly-ing asset on its books and, if applicable, continue to depreciate the underlying asset (i.e., the financing method set forth under current literature in Topic 840). The IASB accounting for sale-leasebacks restricts the amount of gain to be recognized when a sale occurs. The The repercussions of these changes are expected to significantly influence and alter commercial transactions, creating a sea change likely to color the next generation of lease activity. Under current GAAP, a lessee’s continuing involvement in the risks and rewards of a transferred real estate asset (in-cluding integral equipment) would preclude sale-leaseback accounting. No such restriction exists for non-integral equip-ment today, leading to significant flexibility on the timing, nature and execution of arrangements for common catego-ries of equipment including structures such as TRAC leases and synthetic leases. Features such as non-bargain purchase options (whether fixed or at the then fair market value) or residual guarantees do not preclude sale-leaseback account-ing for equipment today, but merely serve to defer some or all of the gain on sale until the guarantee’s resolution. Similarly, from the lessor’s standpoint, symmetrical accounting applies in the case of a failed sale-leaseback under current GAAP when the lessor accounts for all sale-leasebacks on the same basis as a lease of newly acquired property. 40 JULY/AUGUST/SEPTEMBER 2015 EQUIPMENT LEASING & FINANCE MAGAZINE ISTOCK