Understanding FASB Rules in Leaseback Financing
Understanding FASB Rules in Leaseback Financing is popular for their potential benefits to both seller-lessees and buyer-lessors. However, a sale and leaseback transaction presents unique accounting challenges that must be addressed effectively. This includes evaluating whether the sale-leaseback qualifies as a sale, determining a reasonable estimate of the underlying asset’s fair value, and properly measuring and handling variable lease payments. Getting these elements right can significantly impact the company’s financial statements.
The new leasing standard, ASC Topic 842, has introduced significant changes to how organizations report their leases on their financial statements. Among other things, it requires that organizations recognize all of their leases on the balance sheet and replaces current guidance that defers gain recognition on the sale portion of a sale-leaseback transaction and records the finance portion over the lease term.
Understanding FASB Rules in Leaseback Financing
Topic 842 offers several election options to ease the implementation process, referred to as practical expedients. Lessors should evaluate these options to determine the appropriate application of the standard and assess whether they can benefit from the available practical expedients in their specific situations.
The new lease standard has major differences from IFRS 16, which eliminates the concept of an operating lease and requires all leased assets be recognized on the balance sheet. Differences also exist in the approach to the impairment of leased assets. IFRS 16 includes guidance for impairment, while ASC Topic 842 leaves that issue open for future consideration. During the Boards’ discussions, they tentatively decided that, for lessors, any impairment of a leased asset should be evaluated first as an adjustment to the lease receivable and performance obligation with any remaining amount being recorded in profit or loss.
