Sale and Leaseback Transaction

What is Sale and Leaseback arrangement?

Just like the term “sale and leaseback” suggests, sale and leaseback arrangement is selling the asset that you hold the legal title to and again leasing it back from the buyer to be used in your business. In fact, the ownership of the asset doesn’t shift to another person, only the legal title of the asset is shifted to another person. 

Meaning of:
Holding title of an asset: Holding document that gives legal right over the asset. (Ownership De Jure)
Owning an asset: Gaining reward and accepting risks of an asset, substantially, by assuming control over the asset. There is no need to hold title of an asset to assume ownership over it. (Ownership De Facto)
Using an asset: Taking hold of an asset to employ it for specific purpose without assuming risks and reward incidental to ownership of the asset.

Essentially in a leaseback arrangement two things happens:
1. Sell the legal title of the asset to the buyer for a consideration
2. Lease the same asset from buyer and make lease payments under the lease arrangement
Meaning, it is simply a loan arrangement. It is the process of freeing up the liquid assets tied to a fixed asset. 

Accounting and Tax Impact

Leaseback transaction where the resulting lease is a finance lease

Point of Transaction

Lessor

Lessee

Accounting

Taxation

Accounting

Taxation

Entering into Sale and Leaseback Transaction

DC and DP are not likely to incur in Sale and Leaseback Transaction

Dr. Lessee PV(LP,GRV,XP/TP)
Cr. Bank
Cr. PL

Dr. Lessee
[MV of Asset]
Cr. Bank
Cr. PL

(If IRR is not determinable, then 15% p.a. is used)

Dr. Bank
[Leaseback Proceeds]
Cr. Asset
[Carrying Value of Asset]
Cr. Lease Liability [PV(LP)]
Dr. RoUA
[(-Lease Liability – Bank + FV of Asset)×(-Asset/FV of Asset)]
Dr. PL

Dr. Bank
Cr. Disposal Proceeds
Dr. Asset [MV of Asset]
Cr. Lessor

(If IRR is not determinable, then 15% p.a. is used)

Down Payment (DP)

Lease Payment (LP) Accrued

Depreciation Cost

Dr. Depreciation
Cr. RoUA

Dr. Depreciation
Cr. Asset

Unwinding Cost

Dr. Lessee
Cr. Unwinding Income

Dr. Lessee
Cr. Unwinding Income

Dr. Unwinding Expense
Cr. Lease Liability

Dr. Unwinding Expense
Cr. Lessor

Lease Payment (LP) Made

Dr. Bank
Cr. Lessee

Dr. Bank
Cr. Lessee

Dr. Lease Liability
Cr. Bank

Dr. Lessor
Cr. Bank

Exiting Lease with Incurring of DC

Leaseback transaction where the resulting lease is an operating lease

Point of Transaction

Lessor

Lessee

Accounting

Taxation

Accounting

Taxation

Entering into Sale and Leaseback Transaction

DC and DP are not likely to incur in Sale and Leaseback Transaction

Dr. Lessee PV(LP,GRV,XP/TP)
Cr. Bank
Cr. PL

Dr. Asset
Cr. Bank
Cr. PL

Dr. Bank
[Leaseback Proceeds]
Cr. Asset
[Carrying Value of Asset]
Cr. Lease Liability [PV(LP)]
Dr. RoUA
[(-Lease Liability – Bank + FV of Asset)×(-Asset/FV of Asset)]
Dr. PL

Dr. Bank
Cr. Asset

Down Payment (DP)

Lease Payment (LP) Accrued

Dr. Lease Expense
Cr. Lessor

Depreciation Cost

Dr. Depreciation
Cr. Asset

Dr. Depreciation
Cr. RoUA

Unwinding Cost

Dr. Lessee
Cr. Unwinding Income

Dr. Unwinding Expense
Cr. Lease Liability

Lease Payment (LP) Made

Dr. Bank
Cr. Lessee

Dr. Bank
Cr. Lessee

Dr. Lease Liability
Cr. Bank

Dr. Lessor
Cr. Bank

Exiting Lease with Incurring of DC