Sale And Leaseback

CFA Level 1 - Liabilities

 

A sale and leaseback constitutes an arrangement where the seller of an asset leases back the same asset from the purchaser.

The lease arrangement is made immediately after the sale of the asset with the amount of the payments and the time period specified. Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement.

A leaseback arrangement is useful when companies need to untie the cash invested in an asset for other investments, but the asset is still needed in order to operate. Leaseback deals can also provide the seller with additional tax deductions. The lessor benefits in that they will receive stable payments for a specified period of time.

• Under both U.S. and IASB GAAP:When the lease is capitalized, SFAS 13 (US GAAP) and IAS 17 (IASB GAAP) require the lessee to defer any gain on the sale of the asset. The gain would then be recognized over the life of the lease.
• Under IAS 17 only:Gains on sale and leasebacks of assets are recognized immediately should the lease be classified as operating.
• Under SFAS 13 only:Gains on sale and leaseback of assets must by amortized over the life of the lease.

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