Financial Accounting and Reporting-CPA Practice Exam

What constitutes a 'minor' transaction in a sale-leaseback?

1. PV PMTs greater than 10% of FV of asset

2. PV PMTs equal to or less than 10% of FV of asset

3. PV PMTs equal to 90% of FV of asset

4. PV PMTs greater than FV of asset

The correct answer is: PV PMTs equal to or less than 10% of FV of asset

In the context of a sale-leaseback arrangement, a 'minor' transaction is defined by the present value of the lease payments (PV PMTs) being equal to or less than 10% of the fair value (FV) of the asset involved in the transaction. This classification is important because it determines which accounting treatments apply and how the transaction is reflected in financial statements. When the present value of lease payments is minimal relative to the asset's fair value, it signifies that the leaseback is effectively a financing arrangement rather than a significant shift in ownership of the asset. In these cases, the lessor and lessee may structure the transaction in a way that the underlying economic benefits of the asset remain with the seller, indicating that the relationship retains a certain level of control and benefit over the asset despite the sale. Transactions characterized as 'minor' are treated differently compared to more sizable or substantial sale-leaseback transactions, entailing different disclosures and recognition in the financial records. This broader categorization of how leaseback transactions are assessed facilitates consistency in financial reporting and ensures that stakeholders understand the implications of these arrangements. Understanding this concept is essential for assessing the implications that sale-leaseback agreements have on a company's balance sheet, income statement, and cash