INTERMEDIATE ACCOUNTING
TENTH CANADIAN EDITION
Kieso • Weygandt • Warfield • Young • Wiecek • McConomy
CHAPTER 20
Appendix 20A
Other Lease Issues
PREPARED BY:
Lisa Harvey, CPA, CA
Rotman School of Management,
University of Toronto
1
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
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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
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3
Seller-Lessee Accounting
• If the lease meets the capital or finance
lease criteria, seller-lessee accounts for
the transaction as a sale and the lease as
a capital or finance lease
• If none of the capital or finance lease
criteria are met, lessee accounts for the
transaction as a sale and the lease as an
operating lease
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4
Seller-Lessee Accounting
• Under IFRS, any gains or losses on the sale
of the property leased back are amortized
over the leased term (if a finance lease) or
recognized in income (if operating lease and
selling price = FV)
• Under ASPE, 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)
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5
Lessee Accounting
• If the selling price is less than fair value,
the seller-lessee must write down the
asset to FV and recognize the full loss in
the year
– If the lease payments are below market rate to
compensate for this impairment, the loss is
deferred and amortized
• If leased asset is land only, amortize
straight-line over the lease term
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6
Purchaser-Lessor Accounting
• Lessor applies regular lease standards
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7
Sale-Leaseback Illustration
Given:
• On Jan 1, 2015 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 FV = $80 million on Jan 1/15 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
– Present value of MLP is $80 million (Table A-5; i=12%; n=15)
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8
Accounting by Lessee Inc.
January 1, 2015: Sale of Aircraft to Lessor Inc.
Cash
80,000,000
Accumulated Depreciation
10,000,000
Aircraft
85,500,000
Deferred Profit on
Sale-Leaseback
4,500,000
January 1, 2015: Leaseback Transaction
Aircraft under Lease
80,000,000
Obligations Lease
80,000,000
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9
Accounting by Lessee Inc.
January 1, 2015: First Lease Payment
Obligations under Lease
10,487,443
Cash
10,487,433
2015 Executory Costs
Operating Expense
Cash or Accounts Payable
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XXX
XXX
10
Accounting by Lessee Inc.
December 31, 2015: Depreciation Expense
Depreciation Expense
5,333,333
Depreciation Amortization
5,333,333
($80,000,000 / 15 years)
December 31, 2015: Depreciation of Deferred
Profit on Sale–Leaseback
Deferred Profit on
Sale-Leaseback
300,000
Depreciation expense
300,000
($4,500,000 / 15 years)
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11
Accounting by Lessee Inc.
December 31, 2015: Interest Expense
Interest Expense
8,341,507
Interest Payable
8,341,507
[($80,000,000 - $10,487,443) x 12%]
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12
Accounting by Lessor Inc.
January 1, 2015: Purchase of Aircraft from Lessee Inc.
Aircraft Acquired for Lease
80,000,000
Cash
80,000,000
January 1, 2015: Leaseback Transaction
Lease Payments Receivable 157,311,645
Aircraft Acquired for Lease
80,000,000
Unearned Interest Income
77,311,645
($10,487,443 x 15 years = 157,311,645)
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13
Accounting by Lessor Inc.
January 1, 2015: First Lease Payment
Cash
10,487,443
Lease Receivable
10,487,443
December 31, 2015: Interest Revenue
Unearned Interest Income 8,341,507
Interest Income
8,341,507
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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
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15
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