Sale and Leaseback - How Does It Work?

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Subject: Sale and Leaseback Explanation 

Sale and leaseback is a plan whereby an organization which is the seller-lessee sells a product to another party, regarded as buyer-lessor, and after selling, the latter lease the product back. A company must decide whether the decision is for a financing lease or operating lease before adopting the sale and leaseback. When a company is granted the operating lease, its responsibilities and rights of ownership are maintained by the buyer-lessor, and the seller-lessee’s rights are limited to use of the product. Conversely, if the plan is a financing lease, the process is likened to a hire purchase acquisition. Fundamentally, at the end of the lease period, the seller-lessee will still own the full rights and responsibility to hold and use the property in any way they want. 

Previously, the International Accounting Standard had accounted for the sale and leaseback transaction based on seller-lessee. Today, however, such stipulations have advanced where the IFRS 16 does not account for transactions based on financing or operating leases. The regulation further guides that the seller-lessee must apply to a sale and leaseback ( Sacarin, 2017). Also, IFRS 16 offers an analysis that buyer-lessor should follow in which the two must determine if the sale and leaseback will be a sale or just rent upon the agreement between the seller and the buyer. The agreement at hand will be per IFRS 15 of “revenue from contracts with customers.” Thus, accounting for the transaction will depend on whether the process qualifies to be a sale ( Tong, 2014). 

There are two possible ways in which a seller-lessee can account for gains. First, if the seller has the right to property, it means that the present value of the property is at least 90 percent of the property’s book value. In effect, this indicates that the company did not entirely give out the property, and the sale and leaseback are equivalent to a loan. The second option of making a gain is where the present value of the property is less than ten percent. In such a situation, the seller-lessee does not have rights and responsibilities, and the process is an operating lease. 

Given the two options, General tools Company is highly unlikely to get any gains. Essentially, the sale-leaseback process acts as collateral of getting money to finance the organization’s operations. The buyer-lessor will be issuing out a loan, and General backs will have to repay the loan in the next six years. Thus, the process must be transferred to the sale so that at the end of the lease ( Spiceland, Nelson & Thomas, 2020). General Tools can get back its assets as the readings in the Bible assert; God blesses the work of one’s hands (Deuteronomy 28:12, The New King James Version). 

Part Two: Response 

Indeed, the finance lease acts as a measure of determining the present value of an asset. Upon evaluating the property and its present value is more than ninety percent of the asset’s book value, then the sale and leaseback is known as a financing lease. Despite the lease, the seller-lessee will still have the rights and responsibility of the property. Spiceland, Nelson & Thomas (2018) opine that when a greeing on the finance lease, it is essential to transfer the transaction process as sales transactions. The process will assist the seller-lessee to retain the asset at the end of the lease period. 

Since Wal-Mart does not have the legal rights over the asset, it can gain them through amortization. Paying the lease liabilities is like making a partial payment over the asset which it will have at the end of the lease period. Before making full payment to get the asset, the lender owns Wal-Mart. The author effectively applies the teachings in Proverbs 22:26-27 that shed light on the supremacy of the lenders over the poor. Also, the Romans 13:7-8 teachings go a long way to stressing on the need to repay what one owes, hence the informed supposition that Wal-Mart should pay the amount it owes in full. 

References 

Sacarin, M. (2017). IFRS 16 “Leases”–consequences on the financial statements and financial indicators.  The Audit Financiar journal ,  15 (145), 114-114. 

Spiceland, J.D., Nelson, M.W., & Thomas, W.B. (2018). Intermediated Accounting , New York, NY: McGraw-Hill Education. 

Spiceland, J.D., Nelson, M.W., & Thomas, W.B. (2020). Intermediated Accounting , New York, NY: McGraw-Hill Education. 

Tong, T. L. (2014). A Review of IFRS 15 Revenue from Contracts with Customers.  Çevrimiçi) http://www. masb. org/my/images/2014-09-15% 20Review% 20of%-20IFRS ,  20 .