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Sale criteria
In SLB transactions, the sale should comply with the provisions of ASC Topic 606. “Revenues from Contracts with Customers.” Topic 842 aligns lessee and lessor accounting in several key respects with the provisions of revenue recognition guidance in Topic 606, and does not differentiate between leases of real estate and leases of other assets.
Seller-lessees can account for the transfer of assets as a sale if the following two conditions exist (ASC 842-40-25-1):
- A contract exists, based on ASC 606-10-25-1 through 25-8
- The seller-lessee satisfies its performance obligation by transferring control of assets to the buyer-lessor (ASC 606-10-25-30).
Sale of assets by seller-lessees implies that buyer-lessors (or the customers) have obtained control of assets. If the transaction fails as a sale, it also fails as a SLB transaction. In a bona fide SLB transaction, a seller-lessee recognizes the full amount of the gain from a SLB transaction (ASC 842-40-25-1).
If the leaseback phase of a SLB transaction fails, the buyer-lessor classifies the transaction as a sales-type or direct financing lease, and the seller-lessee classifies it as a finance lease (ASC 842-40-25-2).
Control criteria.
If a seller-lessee controls the underlying asset—that is, it can direct its use and obtain substantially all of its remaining benefits—before transferring it to a buyer-lessor, the transaction may be classified as a SLB transaction if the other criteria have been satisfied (ASC 842-40-55-1). If, however, the seller-lessee does not obtain control of the underlying asset, even if it obtains the legal title, before transferring it to buyer-lessor, the transaction fails as a SLB transaction (ASC 842-40-55-2).
A buyer-lessor obtains control of an asset when a contract exists (ASC 606-10-25-1 through 25-8) and the seller-lessee has performed its obligations by transferring control of assets to the buyer-lessor. ASC Topic 606 identifies five indicators that a customer (in this case a buyer-lessor) has obtained control of an asset:
- Customer has legal title
- Customer has physical possession
- Customer has the significant risks and rewards of ownership
- Customer has accepted the asset
- Seller has a present right to payment.
The guidance presents the above as indicators rather than criteria, and not all indicators must be present to conclude that a buyer-lessor has control of the transferred asset. Clearly, these indicators have shifted judgment for transfer of control in SLB transactions to buyer-lessors.