This free, guided checker walks your finance team through the key decision points for ASC 842 Sale-Leaseback Assessment. Answer a few questions to see the likely treatment and the evidence to document.
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A sale-leaseback is accounted for as a sale only if the transfer of the asset qualifies as a sale under ASC 606, which turns on whether the buyer-lessor obtains control (ASC 842-40-25-1). Work through whether a contract exists under ASC 606-10-25-1 and whether control transfers using the indicators in ASC 606-10-25-30, but assess control after considering the leaseback and any repurchase rights, because those features can mean control never passes. Do not assume a signed sale agreement and cash proceeds are sufficient; the substance of the combined arrangement governs.
Without a sale under ASC 606, the transaction is a failed sale-leaseback accounted for as a financing (ASC 842-40-25-5).
Official guidance: FASB Accounting Standards Codification
Classify the leaseback from both perspectives: it precludes sale accounting if it is a finance lease to the seller-lessee under ASC 842-10-25-2 or a sales-type lease to the buyer-lessor under ASC 842-10-25-3. A leaseback that meets those criteria transfers control of essentially the entire remaining life or value of the asset, which is inconsistent with the buyer-lessor having obtained control in the transfer. Run the five classification criteria on the leaseback term and payments, not the original asset life, and remember a bargain or reasonably-certain purchase option in the leaseback is itself disqualifying.
A finance or sales-type leaseback precludes sale accounting under ASC 842-40-25-2, so the transaction is a failed sale.
Official guidance: FASB Accounting Standards Codification
A repurchase option held by the seller-lessee is compatible with a sale only if both conditions in ASC 842-40-25-3 are met: the exercise price is the asset's fair value at the exercise date, and substantially identical alternative assets are readily available in the marketplace. If either condition fails, the seller-lessee retains control and the transaction is a failed sale. A fixed-price or bargain repurchase option almost always fails the fair-value condition, and a specialized asset with no ready market fails the alternative-assets condition.
A repurchase option that fails the ASC 842-40-25-3 conditions precludes sale accounting, so the transaction is a failed sale.
Official guidance: FASB Accounting Standards Codification
A sale requires the buyer-lessor to obtain control, so continuing involvement that leaves the seller-lessee with the risks or rewards of ownership can defeat sale accounting even after the repurchase-option test is passed. Look for guarantees of the buyer-lessor's financing, residual value guarantees, put options held by the buyer-lessor, or arrangements that cap the buyer-lessor's return. Evaluate each feature against the control indicators in ASC 606-10-25-30 rather than treating the leaseback in isolation.
Continuing involvement that prevents control from transferring means no sale occurred under ASC 606, so the transaction is a failed sale-leaseback accounted for as a financing (ASC 842-40-25-5). The buyer-lessor obtains control of the asset, so a sale has occurred; assess whether the sale price and leaseback payments are at market terms (ASC 842-40-30-1).
Official guidance: FASB Accounting Standards Codification
Compare the combination of the sale price and the leaseback payments with market terms, using the most observable fair value and market-rent evidence available. Terms are frequently set off market on purpose - for example, a higher sale price paired with higher rent - so evaluate the package rather than each element alone. When terms are off market, the difference is not gain: ASC 842-40-30-2 reallocates it to prepaid rent or additional financing, so identifying the off-market amount is a prerequisite to measuring the gain or loss.
Sale accounting applies at market terms: derecognize the asset and recognize the full gain or loss on the sale (ASC 842-40-30-1). The terms are off market, so measure and record the off-market adjustment under ASC 842-40-30-2 before recognizing the gain or loss.
Official guidance: FASB Accounting Standards Codification
When terms are off market, ASC 842-40-30-2 requires an adjustment measured on whichever difference is more readily determinable: sale price versus fair value, or the present value of contractual lease payments versus market rents. A below-market package is treated as prepaid rent that increases the leaseback right-of-use asset, while an above-market package is treated as additional financing provided by the buyer-lessor. The common trap is recognizing the full nominal gain without first stripping out the off-market element, which overstates the gain.
The below-market shortfall is recognized as prepaid rent that increases the leaseback right-of-use asset before the gain or loss is measured (ASC 842-40-30-2). The above-market excess is recognized as additional financing provided by the buyer-lessor, not as gain, before the gain or loss is measured (ASC 842-40-30-2).
Official guidance: FASB Accounting Standards Codification
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