How Sale-Leaseback Accounting Works Under ASC 842 - and Why It Matters for Retailers

ASC 842 lease accounting may impact corporate earnings for many retail tenants.

“Sale-leaseback” transactions, which are sometimes used to monetize corporate real estate portfolios, must be treated differently under the new lease accounting rules. Since retailers are traditionally more likely to utilize these transactions, they are also more likely to see noticeable changes in earnings.

What is a Sale and Leaseback Transaction?

A sale and leaseback transaction occurs when the seller transfers an asset to the buyer, and then leases the asset from the buyer. In this type of transaction, the buyer (or lessor) is typically a finance company or institutional investment organization. Companies use sale-leaseback transactions to free up cash tied up in assets like real estate while retaining use of the space — without taking on traditional debt. For retail and restaurant tenants with large property footprints, this can make sale-leasebacks a particularly attractive financing tool.

Sale-Leaseback Accounting Under ASC 842

In the past, many companies structured these arrangements as operating leases, with the goal of keeping the property values and the associated liability off balance sheet. Depending on the lease terms, the arrangement may have even been cheaper than financing the property purchases with bank loans. Because ASC 842 now requires virtually all leases to be recorded on the balance sheet, the off balance sheet advantage of these arrangements no longer exists.

What Changed for the Seller-Lessee?

If the transfer qualifies as a sale, the seller-lessee:

• Derecognizes the transferred asset from its books
• Records a right-of-use (ROU) asset and lease liability for the leaseback portion
• Recognizes only the portion of any gain or loss related to the rights transferred to the buyer

Under previous lease accounting rules, a sale-leaseback transaction may have generated a deferred gain to be recorded as an offset to future rent expense. However during transition to ASC 842, companies may need to record such gains to equity immediately and essentially lose a monthly credit to rent expense going forward. This “true-up” can move the needle on earnings per share for many retailers.

What Changed for the Buyer-Lessor?

The buyer-lessor accounts for the purchase of the asset and the lease separately, applying the relevant ASC 842 lease classification criteria to determine whether the leaseback is an operating or finance lease.

Sale-Leaseback Accounting Example

Consider a retailer that owns a store location on its books at $2 million. It sells the property for $5 million to an investor and immediately leases it back over 15 years.

• If it qualifies as a sale: The retailer recognizes the $3 million gain (subject to adjustments for ROU asset proportionality), removes the asset from its books, and records a new ROU asset and lease liability.
• If it fails as a sale: No gain is recognized. The $5 million in proceeds is recorded as a debt, and the retailer continues depreciating the asset.

The accounting outcome — and its effect on earnings — can differ significantly depending on which path applies.

Real-World Sale-Leaseback Impacts on Retail Tenants

Examples related to the impact of sale-leaseback transactions include:

Bloomin’ Brands, owner of several popular restaurant brands including Outback and Carrabba’s, decreased EPS by $0.02.

Fiesta Restaurant Group, owner of the Pollo Tropical and Taco Cabana brands, reported ” a significant impact on our results of operations because we had $18.6 million in sale-leaseback gains from which we no longer receive a benefit to rent expense.”

Furniture Retailer Haverty’s reported a $6.8 million adjustment to equity related to adopting the new leasing standard, due in part to de-recognizing the gain on previous sale-leaseback transactions.

These examples illustrate how the transition to ASC 842 can have a material impact on reported earnings — particularly for companies with large retail or restaurant lease portfolios.

Manage Your Lease Portfolio with CoStar REM

CoStar has helped hundreds of corporations – including retailers and restaurants – transition to the new ASC 842 standard with our enterprise lease accounting software and services.