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) | Dr. Lessee (If IRR is not determinable, then 15% p.a. is used) | Dr. Bank | Dr. Bank (If IRR is not determinable, then 15% p.a. is used) |
Down Payment (DP) | – | – | – | – |
Lease Payment (LP) Accrued | – | – | – | – |
Depreciation Cost | – | – | Dr. Depreciation | Dr. Depreciation |
Unwinding Cost | Dr. Lessee | Dr. Lessee | Dr. Unwinding Expense | Dr. Unwinding Expense |
Lease Payment (LP) Made | Dr. Bank | Dr. Bank | Dr. Lease Liability | Dr. Lessor |
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) | Dr. Asset | Dr. Bank | Dr. Bank |
Down Payment (DP) | – | – | – | – |
Lease Payment (LP) Accrued | – | – | – | Dr. Lease Expense |
Depreciation Cost | – | Dr. Depreciation | Dr. Depreciation | – |
Unwinding Cost | Dr. Lessee | – | Dr. Unwinding Expense | – |
Lease Payment (LP) Made | Dr. Bank | Dr. Bank | Dr. Lease Liability | Dr. Lessor |
Exiting Lease with Incurring of DC | – | – | – | – |
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