A sale and leaseback transaction is when the seller of an asset becomes the lessee and the purchaser becomes the lessor.
What is Meant By Sale and Leaseback?
A sale-leaseback agreement is one made between a company and a purchaser where the company that sells an asset, leases back that same asset from the purchaser.
Usually used for high value fixed assets like real estate, aerospace equipment, and the like.
Should I Do a Sale Leaseback?
Most commonly, builders or companies with high-cost fixed assets use leasebacks.
They use them because they are a good way for companies to use the money they invested in an asset for other purposes, but still have access to use the asset.
What is the Advantage of Sale and Leaseback?
There are many advantages to a sale and leaseback agreement.
- Can be a good alternative way of accessing capital. Traditionally, the way for a company to quickly access cash is to take out a loan, which shows up as a debt on a balance sheet
- A leaseback allows a company to generate capital almost as quickly
- Leasebacks can provide additional tax deductions
- Enable a company to expand their business
- Limits the volatility risk of owning the asset
- The buyer/lessor also could see some benefits from this lease agreement:
- They get a guaranteed lease, a fair return on investment, and a stable income stream for a specified amount of time
What is an Example of Sale and Leaseback?
The most common and easily understood example of a leaseback is a commercial bank. The bank sells use of the vaults it owns to people who want to put things in them for an amount of time.
Other examples include NBFCs, mutual funds, pension funds, and hedge funds.
Accounting for Sale and Leasebacks
A lot has changed in recent years with FASB’s ASC 842 lease accounting standard:
- It is less challenging to determine whether control has passed from a seller-lessee to a buyer-lessor when assets are under construction
- However, those preparing financial statements for complicated leasing agreements might have difficulty applying the provisions to their statements.
Accounting Software for Sale and Leaseback Documentation
To avoid errors that might come from the complicated nature of so many lease agreements, think about utilizing lease accounting software to make accounting faster and less risky. GBQ is pleased to partner with lease accounting software LeaseCrunch to simplify your lease accounting adoption efforts. To learn more, contact Kristin Romaker or Mary Stucke.
