After much deliberation, the Financial Accounting Standards Board (FASB) finalized changes to the accounting rules in the first quarter of 2016, a mere 40 years after the release of FAS 13 – Accounting for Leases. With these changes, the new rules seek to improve financial reporting about lease transactions.
But what impact will the Accounting Standards Update have on equipment sale and leaseback transactions? The new guidance seeks to provide a more standard approach to evaluating when a “sale” takes place that would result in sale and leaseback accounting by focusing on who ultimately has control of the leased assets. Equipment Leasing & Finance highlighted these conclusions about changes under the new standard:1
Classification of the leaseback as a finance lease will preclude sale recognition.
What this means: Under a finance lease the seller-lessee is deemed to still own the assets, therefore a sale to the buyer-lessor never occurred. In order to achieve sale treatment, the leaseback must be accounted for as an operating lease.
The granting of a fixed-price repurchase option with respect to the transferred property will preclude sales recognition. The leaseback can include a repurchase option exercisable at the fair value of the asset on the exercise date if there are alternative assets readily available in the marketplace.
What this means: The standard concludes that control of the leased assets does not pass to the buyer-lessor if the seller-lessee can unilaterally decide to reacquire the assets at a fixed-price.
If the seller-lessee transfers control of the asset to the buyer-lessor, gain or loss will be recognized immediately upon sale, except in the case of off-market terms.
What this means: The prohibition over recognizing a gain or loss when a transaction is based on “off-market terms” is to ensure the sale of the leased assets reflects a transaction between a willing buyer and seller.
Failed sale-leasebacks will be reported as financings by both the lessee and lessor.
What this means: If for any reason the transaction cannot be recognized as a sale to the buyer-lessor, it must be accounted for as financings by both the lessee and lessor.
It is important to note that the new rules will become effective for fiscal years beginning after December 15, 2018 for public companies or after December 15, 2019 for private companies. Grandfathering provisions are in place for existing sale and leaseback transactions.
Even with these changes in play, sale and leaseback transactions can still be economically advantageous for technology organizations.
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Return Cash to the
Balance Sheet
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Transfer
Tax Benefits
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Reduce
Ownership Risks
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Per FASB, the new guidance will improve lease accounting by aligning lessor accounting and sale and leaseback transaction guidance more closely to comparable revenue guidance in the 2014 revenue recognition standard.2 Material changes will be observed for those leasebacks that contains a purchase option. However, technology organizations will still continue to receive the benefits of sale and leaseback transactions, including the ability to put cash back on the books while maintaining use of the assets. An improved cash position can help maintain debt ratings, improve liquidity rates and avoid bank covenant violations. Sale and leasebacks can also be used to consolidate multiple capital acquisitions onto one lease with a simple monthly payment.
Considering an equipment sale and leaseback? A cash reimbursement could be the fuel you need to fund growth & innovation initiatives, strategic projects, or debt reduction. See how we are helping organizations like yours employ this strategy here.
This is for informational purposes only. Please consult your auditor for confirmation and discuss covenants with banks and creditors. First American does not provide tax, legal or accounting advice.
1 Berman, M. and Hurd, R. (2016, October). A Preview of the New Accounting for Sale and Leasebacks. Equipment Leasing and Finance. 48-50.
2 http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027207574