ASC 842 sale-leaseback: qualify sale and recognize gain

Answer C. ASC 842 includes specific BUILD-TO-SUIT guidance addressing whether the seller-lessee retains effective control during construction such that the transaction should be treated as a financing rather than a sale. Key factors that may make the seller-lessee the deemed owner during construction (and result in a FAILED sale-leaseback): (1) substantial control over construction (specifications, design oversight, contractor selection); (2) cost overrun absorption; (3) takeover provisions if the project fails; (4) financing involvement (paying construction draws); (5) bearing construction risk. If Mountain is deemed the owner during construction, the post-construction 'sale' to LeaseCo is examined under ASC 606 control-transfer principles, and the during-construction control may indicate the SALE TEST FAILS (Mountain didn't really transfer something LeaseCo built; Mountain effectively retained ownership throughout). A FAILED sale-leaseback is accounted for as a FINANCING TRANSACTION: Mountain keeps the asset on its books, recognizes no gain, and records a financing liability for the cash received. Answer A is incorrect: ASC 842 specifically requires considering construction-period involvement; this is not separable. Answer B is incorrect: build-to-suits are sale-leasebacks, not pure construction contracts; ASC 842's build-to-suit rules apply. Answer D is incorrect: build-to-suits are NOT categorically failed sales; the analysis depends on the level of seller-lessee control during construction.

Answer D. When sale-leaseback parties are part of the same consolidated group, the transaction is INTERCOMPANY and must be ELIMINATED in consolidation. From the consolidated entity's perspective: there is no SALE (you can't sell to yourself) and there is no LEASE (you can't lease from yourself). The intercompany sale-leaseback is purely an internal restructuring with no impact on consolidated F/S. CONSOLIDATION ELIMINATIONS for the Stratos+PartnerCo intercompany sale-leaseback: (1) eliminate the sale (Stratos's revenue and PartnerCo's purchase recognition); the $10M cash transferred is reclassified as an intercompany transfer (which itself eliminates against PartnerCo's investment in Stratos). (2) eliminate the gain, the equipment remains on the consolidated books at its ORIGINAL CARRYING AMOUNT. (3) eliminate the leaseback, Stratos's lease expense and PartnerCo's lease income are both eliminated; ROU asset and lease liability eliminate against PartnerCo's lease receivable. (4) The equipment continues to depreciate on the consolidated books at the original carrying amount. STAND-ALONE STATEMENTS of Stratos: the sale-leaseback IS recognized normally per ASC 842, the elimination only happens at the consolidation level. Answer A is incorrect: intercompany sale-leasebacks must be eliminated in consolidation. Answer B is incorrect: FMV recognition would treat the parties as unrelated, but they are members of the same consolidated group. Answer C is incorrect: the transaction is permanently eliminated as long as parties remain in the consolidated group; there's no future-deferred recognition trigger.

Answer A. Under ASC 842, a qualifying sale-leaseback recognizes the SALE GAIN IMMEDIATELY (not deferred). Northern's accounting: (1) DERECOGNIZE the building from PP&E ($30M carrying amount removed). (2) RECORD CASH RECEIVED ($45M). (3) RECOGNIZE GAIN ON SALE ($45M − $30M = $15M) in current-period income statement. (4) RECORD A NEW ROU ASSET AND LEASE LIABILITY for the leaseback at the present value of the 15-year lease payments. INCOME STATEMENT IMPACT: One-time $15M gain in the period of sale (subject to applicable tax). Going forward, lease expense replaces depreciation expense (lease expense is typically lower than depreciation + interest on a financed building). BALANCE SHEET IMPACT: Building (PP&E) replaced with ROU asset + lease liability. The ROU asset and lease liability initial measurement at PV of payments is typically substantially less than the $45M building, leaving Northern with $45M cash + smaller ROU asset on assets side, and lease liability + retained earnings (gain) on liabilities/equity side. CASH FLOW IMPACT: $45M cash inflow from investing activities (or financing, depending on classification). Recurring lease payments are operating outflows. KEY POINT: This is a major accounting change from old ASC 840 (which deferred gains). Under ASC 842, the sale-leaseback is treated like any other sale + new lease. Answer B is incorrect: gain deferral was the old ASC 840 framework. ASC 842 recognizes gain immediately. Answer C is incorrect: the lease liability doesn't offset the gain. Sale recognition and lease recognition are separate. Answer D is incorrect: ASC 842 explicitly contemplates and prescribes sale-leaseback accounting; gain recognition is part of the framework.

Answer B. This is a textbook SALE-LEASEBACK transaction governed by ASC 842 (specifically ASC 842-40). The seller-lessee (Saxon) sells the asset to the buyer-lessor (RealCorp) and concurrently leases it back. The accounting framework: (1) Apply ASC 606 control-transfer principles to determine if a 'sale' occurred. With no buy-back rights, no put options, no repurchase commitments, and FMV terms, control has transferred to RealCorp, the sale qualifies. (2) If the sale qualifies: recognize the sale (with gain or loss = sale price minus carrying amount) and separately recognize the lease arrangement (ROU asset + lease liability at PV of payments). (3) If the sale does NOT qualify (e.g., because of a buy-back option below expected FMV): account for the entire transaction as a FINANCING, no sale, no gain, asset stays on books. Sale-leasebacks are common because they: free up cash from owned real estate / equipment; transfer ownership risks to a financial counterparty; preserve operational use of the asset under a lease. Answer A is incorrect: the 'sale' aspect is highly material; it triggers gain or loss recognition, balance sheet derecognition, and ASC 842's specific sale-leaseback rules. Calling this a 'simple operating lease' ignores half the transaction. Answer C is incorrect: §1031 like-kind exchange applies to TAX-deferred trades of investment/business property, and is a tax concept, not a financial accounting concept. §1031 also doesn't apply when receiving cash (boot defeats deferral). Answer D is incorrect: this is NOT a finance receivable for RealCorp. RealCorp receives an asset (building) and a lease arrangement, not a loan. Saxon doesn't get a receivable; Saxon gets cash and a lease obligation.

Answer C. A KEY CHANGE from ASC 840 to ASC 842 is the timing of GAIN RECOGNITION on sale-leasebacks. UNDER OLDER ASC 840: Sale-leaseback gains were typically DEFERRED and amortized over the leaseback period (with various complex exceptions for minor leasebacks, real estate, etc.). The rationale was that the gain hadn't been 'earned' if the seller-lessee retained substantial use of the asset. The deferred-gain mechanism made sale-leaseback accounting complex and led to financial statement effects that varied widely based on lease classification and asset type. UNDER CURRENT ASC 842: Sale-leaseback gains are recognized IMMEDIATELY at the sale date for QUALIFYING sale-leasebacks (sale qualifies under ASC 606). The leaseback is then accounted for as a separate lease arrangement (operating or finance) under standard ASC 842 lessee rules. THE CHANGE SIMPLIFIES SALE-LEASEBACK ACCOUNTING by aligning it with general sale recognition principles, a sale is a sale, with gain recognized immediately, separately from any post-sale lease arrangement. EXCEPTIONS UNDER ASC 842: (1) FAILED sale-leasebacks (where control didn't transfer) are accounted for as financings, no sale, no gain. (2) Off-market terms require adjusting the sale and lease to FMV substance, which can split the proceeds between sale (gain) and financing. Answer A is incorrect: there is a major timing difference between ASC 840 (deferred) and ASC 842 (immediate). Answer B is incorrect: the directions are reversed. ASC 840 deferred; ASC 842 made gain immediate. Answer D is incorrect: ASC 842 did NOT eliminate sale-leasebacks; it CHANGED the accounting framework but still permits and addresses them.