To raise additional cash, GA Company is negotiating with ABC Company to sell ABC some warehouses GA uses for parts storage and then lease back those warehouses for five years. GA purchased the warehouses one year ago on January 1. Because of its long-term need for warehouse space, GA would like to include in the agreement the option to buy the warehouses back after the five-year lease term. GA anticipates applying the sale-leaseback accounting treatment to the transaction, but is unsure if this is appropriate.

Review the authoritative literature information presented in Appendix A of the case study to determine whether sale-leaseback accounting treatment is appropriate in the situation described above. Copy and paste or type below the correct portion of Appendix A pertaining to this fact situation AND state your answer regarding the proper accounting treatment of this issue.

Answer:

Appendix A

Criteria for Sale-Leaseback Accounting Regarding Real Estate (SFAS #98Now a ASC 840-40-25-9 topic)

Sale-leaseback accounting shall be used by a seller-lessee only if a sale-leaseback transaction includes all of the following:

A normal leaseback as described below.

Payment terms and provisions that adequately demonstrate the buyer-lessor's initial and continuing investment in the property.

Payment terms and provisions that transfer all of the other risks and rewards of ownership as demonstrated by the absence of any other continuing involvement by the seller-lessee.

A normal leaseback is a lessee-lessor relationship that involves the active use of the property by the seller-lessee in consideration of payment of rent, and excludes other continuing involvement provisions or conditions.

A sale-leaseback transaction that does not qualify for sale-leaseback accounting because of any form of continuing involvement by the seller-lessee other than a normal leaseback shall be accounted for by the deposit method or as a financing. Continuing involvement includes provisions where:

The seller-lessee has an obligation or an option to repurchase the property or the buyer-lessor can compel the seller-lessee to repurchase the property.

The seller-lessee guarantees the buyer-lessor's investment or a return on that investment for a limited or extended period of time.

The financial statements of a seller-lessee shall include a description of the terms of the sale-leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement.

The financial statements of a seller-lessee that has accounted for a sale-leaseback transaction by the deposit method or as a financing according to the provisions of this Statement also shall disclose:

The obligation for future minimum lease payments as of the date of the latest balance sheet presented in the aggregate and for each of the five succeeding fiscal years.

The total of minimum sublease rentals, if any, to be received in the future under noncancelable subleases in the aggregate and for each of the five succeeding fiscal years.

Example: On January 1, 2000, Marsh Company sold an airplane with an estimated useful life of ten years. At the same time, Marsh leased back the airplane as follows in the three separate situations:

Rent expense and amortization of the deferred gain under an operating lease is recorded. The amortization is for the 2000 year.

Interest and depreciation is recorded on a capitalized lease.

Sale-Leaseback Transactions

A sale-leaseback transaction is essentially a financing arrangement whereby the property is sold and leased back to the seller.

The sale and the leaseback cannot be accounted for as independent transactions. Any gain or loss on the sale should be deferred and amortized as follows:

If the transactions meet the criteria for treatment as a capital lease, over the useful life of the asset, or

Over the period of time the asset is expected to be used if classified as an operating lease.

If the fair value of the property at the time of the transaction is less than its undepreciated cost, a loss should be recognized for the difference immediately.

If the seller retains use of a minor part (if the present value of the rentals is 10% or less of the fair value of the asset sold) of the property, SFAS #28 requires the sale and lease to be accounted for based on their separate terms (unless the rentals called for are unreasonable relative to current market conditions in which case an appropriate amount would be deferred or accrued by adjusting the profit or loss on the sale). If the seller retains more than a minor part but less than substantially all of the use of the property and the profit on the sale exceeds the present value of the minimum lease payments, the excess would be recognized as profit at the date of the sale.

To raise additional cash, GA Company is negotiating with ABC Company to sell ABC some warehouses GA uses for parts storage and then lease back those warehouses for five years. GA purchased the warehouses one year ago on January 1. Because of its long-term need for warehouse space, GA would like to include in the agreement the option to buy the warehouses back after the five-year lease term. GA anticipates applying the sale-leaseback accounting treatment to the transaction, but is unsure if this is appropriate. Review the authoritative literature information presented in Appendix A of the case study to determine whether sale-leaseback accounting treatment is appropriate in the situation described above. Copy and paste or type below the correct portion of Appendix A pertaining to this fact situation AND state your answer regarding the proper accounting treatment of this issue. Answer: Appendix A Criteria for Sale-Leaseback Accounting Regarding Real Estate (SFAS #98Now a ASC 840-40-25-9 topic) Sale-leaseback accounting shall be used by a seller-lessee only if a sale-leaseback transaction includes all of the following: A normal leaseback as described below. Payment terms and provisions that adequately demonstrate the buyer-lessor's initial and continuing investment in the property. Payment terms and provisions that transfer all of the other risks and rewards of ownership as demonstrated by the absence of any other continuing involvement by the seller-lessee. A normal leaseback is a lessee-lessor relationship that involves the active use of the property by the seller-lessee in consideration of payment of rent, and excludes other continuing involvement provisions or conditions. A sale-leaseback transaction that does not qualify for sale-leaseback accounting because of any form of continuing involvement by the seller-lessee other than a normal leaseback shall be accounted for by the deposit method or as a financing. Continuing involvement includes provisions where: The seller-lessee has an obligation or an option to repurchase the property or the buyer-lessor can compel the seller-lessee to repurchase the property. The seller-lessee guarantees the buyer-lessor's investment or a return on that investment for a limited or extended period of time. The financial statements of a seller-lessee shall include a description of the terms of the sale-leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement. The financial statements of a seller-lessee that has accounted for a sale-leaseback transaction by the deposit method or as a financing according to the provisions of this Statement also shall disclose: The obligation for future minimum lease payments as of the date of the latest balance sheet presented in the aggregate and for each of the five succeeding fiscal years. The total of minimum sublease rentals, if any, to be received in the future under noncancelable subleases in the aggregate and for each of the five succeeding fiscal years. Example: On January 1, 2000, Marsh Company sold an airplane with an estimated useful life of ten years. At the same time, Marsh leased back the airplane as follows in the three separate situations: Interest and depreciation is recorded on a capitalized lease. Sale-Leaseback Transactions A sale-leaseback transaction is essentially a financing arrangement whereby the property is sold and leased back to the seller. The sale and the leaseback cannot be accounted for as independent transactions. Any gain or loss on the sale should be deferred and amortized as follows: If the transactions meet the criteria for treatment as a capital lease, over the useful life of the asset, or Over the period of time the asset is expected to be used if classified as an operating lease. If the fair value of the property at the time of the transaction is less than its undepreciated cost, a loss should be recognized for the difference immediately. If the seller retains use of a minor part (if the present value of the rentals is 10% or less of the fair value of the asset sold) of the property, SFAS #28 requires the sale and lease to be accounted for based on their separate terms (unless the rentals called for are unreasonable relative to current market conditions in which case an appropriate amount would be deferred or accrued by adjusting the profit or loss on the sale). If the seller retains more than a minor part but less than substantially all of the use of the property and the profit on the sale exceeds the present value of the minimum lease payments, the excess would be recognized as profit at the date of the sale. To raise additional cash, GA Company is negotiating with ABC Company to sell ABC some warehouses GA uses for parts storage and then lease back those warehouses for five years. GA purchased the warehouses one year ago on January 1. Because of its long-term need for warehouse space, GA would like to include in the agreement the option to buy the warehouses back after the five-year lease term. GA anticipates applying the sale-leaseback accounting treatment to the transaction, but is unsure if this is appropriate. Review the authoritative literature information presented in Appendix A of the case study to determine whether sale-leaseback accounting treatment is appropriate in the situation described above. Copy and paste or type below the correct portion of Appendix A pertaining to this fact situation AND state your answer regarding the proper accounting treatment of this issue. Answer: Appendix A Criteria for Sale-Leaseback Accounting Regarding Real Estate (SFAS #98Now a ASC 840-40-25-9 topic) Sale-leaseback accounting shall be used by a seller-lessee only if a sale-leaseback transaction includes all of the following: A normal leaseback as described below. Payment terms and provisions that adequately demonstrate the buyer-lessor's initial and continuing investment in the property. Payment terms and provisions that transfer all of the other risks and rewards of ownership as demonstrated by the absence of any other continuing involvement by the seller-lessee. A normal leaseback is a lessee-lessor relationship that involves the active use of the property by the seller-lessee in consideration of payment of rent, and excludes other continuing involvement provisions or conditions. A sale-leaseback transaction that does not qualify for sale-leaseback accounting because of any form of continuing involvement by the seller-lessee other than a normal leaseback shall be accounted for by the deposit method or as a financing. Continuing involvement includes provisions where: The seller-lessee has an obligation or an option to repurchase the property or the buyer-lessor can compel the seller-lessee to repurchase the property. The seller-lessee guarantees the buyer-lessor's investment or a return on that investment for a limited or extended period of time. The financial statements of a seller-lessee shall include a description of the terms of the sale-leaseback transaction, including future commitments, obligations, provisions, or circumstances that require or result in the seller-lessee's continuing involvement. The financial statements of a seller-lessee that has accounted for a sale-leaseback transaction by the deposit method or as a financing according to the provisions of this Statement also shall disclose: The obligation for future minimum lease payments as of the date of the latest balance sheet presented in the aggregate and for each of the five succeeding fiscal years. The total of minimum sublease rentals, if any, to be received in the future under noncancelable subleases in the aggregate and for each of the five succeeding fiscal years. Example: On January 1, 2000, Marsh Company sold an airplane with an estimated useful life of ten years. At the same time, Marsh leased back the airplane as follows in the three separate situations: Interest and depreciation is recorded on a capitalized lease. Sale-Leaseback Transactions A sale-leaseback transaction is essentially a financing arrangement whereby the property is sold and leased back to the seller. The sale and the leaseback cannot be accounted for as independent transactions. Any gain or loss on the sale should be deferred and amortized as follows: If the transactions meet the criteria for treatment as a capital lease, over the useful life of the asset, or Over the period of time the asset is expected to be used if classified as an operating lease. If the fair value of the property at the time of the transaction is less than its undepreciated cost, a loss should be recognized for the difference immediately. If the seller retains use of a minor part (if the present value of the rentals is 10% or less of the fair value of the asset sold) of the property, SFAS #28 requires the sale and lease to be accounted for based on their separate terms (unless the rentals called for are unreasonable relative to current market conditions in which case an appropriate amount would be deferred or accrued by adjusting the profit or loss on the sale). If the seller retains more than a minor part but less than substantially all of the use of the property and the profit on the sale exceeds the present value of the minimum lease payments, the excess would be recognized as profit at the date of the sale