Chapter 20
Appendix 20A
Other Lease Issues
Prepared by:
Dragan Stojanovic, CA
Rotman School of Management, University of Toronto
Sale-Leaseback Transactions
• Transaction in which the property owner
(seller—lessee) sells the property to another
party (purchaser—lessor) and immediately
leases it back from the new owner
• Example: company buys land and constructs
a building, sells it to a property investor and
then leases it back
2
Advantages of Sale-Leasebacks
• If equipment purchase has already been
financed, a sale-leaseback can allow the
seller to refinance at lower rates (if rates have
decreased)
• Can provide additional working capital when
liquidity is tight
3
Lessee Accounting
• If the lease the capital or finance lease
criteria, lessee accounts for the transaction
leaseback as a capital or finance lease
• If none of the capital lease criteria is met,
lessee accounts for the leaseback as an
operating lease
4
Lessee Accounting
• Under PE GAAP, any gains or losses on the
sale of the property leased back are amortized
on the same basis as depreciation of the
leased assets (if a capital lease), or in
proportion to the rental payments (if operating
lease)
• Under IFRS, any gains or losses on the sale
of the property leased back are amortized
over the leased term (if a capital lease), or
recognized in income (if operating lease and
fair value used)
5
Lessee Accounting
• If asset is impaired, seller writes it down to FV
and recognizes full loss in the year
• If leased asset is land only, amortize straightline over the lease term
6
Lessor Accounting
• Lessor applies regular lease standards
7
Sale-Leaseback Illustration
• On Jan 1, 2011 Lessee Inc. sells a used Boeing 747
with a cost of $85.5 million and a book value of $75.5
million to Lessor Inc for $80 million and immediately
leases it back
• Conditions are:
– 15 year lease term with equal rental payments of
$10,487,443 at beginning of each year (Table A-5;
i=12%; n=15)
– FV = $80 million on Jan 1/11 and 15 year economic life
– Lessee pays all executory cost
– Lessee amortizes similar owned assets straight-line
over 15 years
– Annual payments assure Lessor 12% return which is
also Lessee’s incremental borrowing rate
8
Accounting by Lessee Inc.
January 1, 2011: Sale of Aircraft to Lessor Inc.
Cash
80,000,000
Accumulated Amortization 10,000,000
Aircraft
85,500,000
Deferred profit on
Sale-Leaseback
4,500,000
January 1, 2011: Leaseback transaction
Aircraft under Capital Lease 80,000,000
Obligations under
Capital Lease
80,000,000
9
Accounting by Lessee Inc.
January 1, 2011: First Lease Payment
Obligations under
Capital lease
10,487,443
Cash
10,487,433
2011 Executory Costs
Executory Costs
Cash or A/P
XXX
XXX
10
Accounting by Lessee Inc.
December 31, 2011: Amortization Expense
Amortization Expense
5,333,333
Accumulated Amortization
5,333,333
($80,000,000 / 15 years)
December 31, 2011: Amortization of Deferred Profit on
Sale–Leaseback
Deferred Profit on
Sale-Leaseback
300,000
Amortization expense
300,000
($4,500,000 / 15 years)
11
Accounting by Lessee Inc.
December 31, 2011: Interest Expense
Interest Expense 8,341,507
Interest Payable
8,341,507
[($80,000,000 - $10,487,443) x 12%]
12
Accounting by Lessor Inc.
January 1, 2011: Purchase of Aircraft from Lessee Inc.
Aircraft
80,000,000
Cash
80,000,000
January 1, 2011: Leaseback transaction
Lease Payments Receivable 157,311,645
Aircraft
80,000,000
Unearned Interest Income
77,311,645
($10,487,443 x 15 years = 157,311,645)
13
Accounting by Lessor Inc.
January 1, 2011: First Lease Payment
Cash
10,487,443
Lease Payments
Receivable
10,487,443
December 31, 2011: Interest Revenue
Unearned Interest Income 8,341,507
Interest Income
8,341,507
14
Real Estate Leases
• If only land is leased, lessee accounts for the
lease as a capital lease if lease transfers
ownership of property (or, under PE GAAP,
bargain purchase option exists)
• If title is not expected to be transferred and land
is minor part of leased property, treat as single
unit
15
COPYRIGHT
Copyright © 2010 John Wiley & Sons Canada, Ltd.
All rights reserved. Reproduction or translation of
this work beyond that permitted by Access Copyright
(The Canadian Copyright Licensing Agency) is
unlawful. Requests for further information should be
addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make
back-up copies for his or her own use only and not
for distribution or resale. The author and the
publisher assume no responsibility for errors,
omissions, or damages caused by the use of these
programs or from the use of the information
contained herein.
16