Introduction

Welcome to Sale-Leaseback training with VLU. This course is designed to give you a better understanding of a sale-leaseback is.

By the end of this course, you should be able to:

• Understand the difference between a Sale-Leaseback and a financial arrangement
• Account for Sale-Leaseback gains or losses
• How to determine if it is a sale lease back or financial agreement

Please take a moment to review the agenda. To view a particular topic, please jump to the corresponding timestamp.

Sale – Leaseback

In this video, we will discuss what a sale-leasback is and how it is different than a financial agreement.

To understand what a sale lease back is, it is best to provide a scenario regarding real estate.

In our example, a company owns the building their headquarters is located in. The company needs to free up capital and decide to sell the building they are located in to an investor. The company then will turn around, and lease it back from the from the investor. Hence the name ‘Sale Leaseback’.

The result of doing this frees up money that would have been otherwise tied up in the ownership and maintenance of the building.

So how is a sale leaseback different than borrowing against the property? Sometimes, the difference is minimal. A sale leaseback may not be as favorable in opening up extra money versus borrowing against the property, and vice versa.

Accountants are asked to determine if what is trying to be done is a true sale leaseback through a series of external tests, which are done outside the Visual Lease Platform.

An example of this would be a company that sells its headquarters facility and then leases that facility back for 20 years. The sale price and the lease rate are both reflective of actual market conditions.

Almost everything else about this transaction classifies it as a sale-leaseback. However, say at the end of the 20 year term they are given the option to buy the property back for $1, which is a bargain purchase option. That is probably enough to fail the sale-leaseback test, as the lessee has a significant economic incentive to repurchase the property, Accountants, however, would need to determine if the leaseback passes or fails. Failing would just make it a financial arrangement.

A company may have a gain or a loss from a sale leaseback, at the time of the sale. This will need to be recorded in the Visual Lease platform.

To accomplish this, first, navigate to the admin tool located here. Next, select financial categories and then select, Add Category.

A popup window will display. Give it a name, code, and abbreviation. Next, select the Rollup Category name, then select GL Entry for the type.

In the subtype, select Gain or Loss on Sale-Leaseback located toward the bottom of the list.

Once the information is entered. Click Save, to save the new financial category.

Next, navigate to the lease record. Select financials, then select Entries. Here, you will create a financial entry on the gain or loss on the sale-leaseback. Please note, the frequency of this entry should be for a one time, GL only, entry. This will cause it to flow to the proper place on line 6 of the disclosure report which will indicate the gain or loss on a sale-leaseback.

After the sale, the company will now be in a lease for the facility, and it should be managed just like any other lease they have.
The example we just gave is for a successful sale-leaseback. But, what if it is considered a failed sale-leaseback?

It is important to note, if a sale-leaseback fails the accounting tests to be considered on, that does not mean that legally the company does not have a valid lease, or a valid sale. The difference is when it fails, the company will account for the transaction, payments, and cashflows as if it were a mortgage loan and will be paid back over time.

The key in a failed sale-leaseback is that it should not appear in the financial statements as a lease and should not be included on the disclosure reports.

The best way to handle this in the Visual Lease platform is to create a lease record. This will allow the company to manage the terms of the contract, manage the payments, as well as everything else. However, an accounting schedule should not be created since the data should not flow through to the reports.

If the company wants to track everything in Visual Lease, it is recommended that when creating the record, it is created to make it something other than a “real estate expense lease”. They can create a new category title “leaseback” to help isolate the record from everything else and make it stand out.

If the company wants to create a schedule, it is recommended to set it up as a hypothetical schedule and set it up as a finance lease in order to not have it feed to journal entries or disclosure reports.

Key Takeaways

This concludes Sale-Leaseback and Exercise Options training with VLU.

Remember…

• Companies typically complete a sale-leaseback to raise cash for company.
• A sale-leaseback should go through a series of tests to determine if it is a true leaseback or a financial arrangement.
•  Account for gain or loss of a sale during a sale-leaseback

Thanks for watching. Any questions, suggestions, or feeback can be sent to support@visuallease.com