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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Universities

Leases — Special Transactions
Sale-Leaseback

According to GASB 87, paragraphs 82-86, sale-leaseback transactions involve the sale of an underlying asset by the owner and a lease of the property back to the seller (original owner). A transaction qualifies for sale-leaseback accounting only if it includes a sale.

GASB 87 requires that a sale-leaseback include a transaction that qualifies as a sale under the guidance for sales of real estate in GASB 62. The sales-of-real-estate criteria include the provision that an option or requirement for a seller to repurchase the asset would preclude sale treatment. A sale-leaseback that does not include a transaction that qualifies as a sale is accounted for as a financing because the substance of the transaction is a borrowing rather than a sale of an asset.

GASB 87 contains specific provisions for when a sale-leaseback has off-market terms. The substance of sale-leaseback transactions with off-market terms is different from similar transactions with market terms and that the benefits of recognizing the substance of the transaction outweigh concerns about the possible cost and complexity of identifying and calculating the difference between market and off-market terms.

A sale of property that is accompanied by a leaseback of all or any part of the property for all or part of its remaining economic life is accounted for by both the seller-lessee and buyer-lessor.

Sale-Leaseback Example:

  1. An agency building needs upgrades and rehab.
  2. The agency sells the building to a developer that rehabs the building.
  3. The developer then leases the building back to the agency.

Financial Statement Presentation and Disclosure

The sale and lease portions of a sale-leaseback transaction must be accounted for in financial statements as two separate transactions (a sale transaction and a lease transaction). For more information, see Note 8 – Leases and Capital Assets – Sale, Disposal or Interagency Transfer of Capital Assets.

Exception: Any difference between the carrying value of the capital asset that was sold and the net proceeds from the sale must be reported as a deferred inflow of resources or a deferred outflow of resources and recognized over the term of the lease as a component of the sale transaction. However, if the lease portion of the transaction qualifies as a short-term lease, any difference between the carrying value of the capital asset that was sold and the net proceeds from the sale must be recognized immediately as a gain or loss on the sale of the asset.

A seller-lessee must disclose the terms and conditions of the sale-leaseback transaction in the notes to financial statements, including future commitments, obligations, provisions or circumstances that require or result in the seller-lessee’s continuing involvement. For detailed lease note disclosure requirements, see Note 8 – Leases.