{ "media_type": "text", "post_content": "Hey I have an ASC840 accounting question on this scenario - a target sold an asset 10 years ago for 10,000,000 and immediately leased it back. They recorded a deferred gain of $1M and amortized it over the term of the lease (still going) and letting that gain every month reduce the rent expense. Since this deal is cash free debt free shouldn’t we treat this as a debt like item? They received the cash in a prior period but we are now stuck with the payments. Debating how to quantify the adjstmnt", "post_id": "61533ff2dd04dc0022a2bfbf", "reply_count": 6, "vote_count": 3, "bowl_id": "5bc69fa51498b20012903b07", "bowl_name": "Transaction Services, M&A, Deal Advisory" }

Hey I have an ASC840 accounting question on this scenario - a target sold an asset 10 years ago for 10,000,000 and immediately leased it back. They recorded a deferred gain of $1M and amortized it over the term of the lease (still going) and letting that gain every month reduce the rent expense. Since this deal is cash free debt free shouldn’t we treat this as a debt like item? They received the cash in a prior period but we are now stuck with the payments. Debating how to quantify the adjstmnt

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Bruh who cares just plug it to retained earnings

funnylikesmart

I could see trying to make it a deal point if it was a cash grab by the sellers that they did as they were starting the process of selling the company, but it was 10 years ago. Practically - what’s the difference between leasing an asset from the entity you sold it to vs a fully neutral third party? Maybe an other ebitda consideration for cash vs gaap rent (and potentially a related party consideration if the now owner of the asset is related) but I don’t see a debt like item here.

smart

All the numbers are made up in this scenario. In my actual scenario I only know the gain but I don’t know what the asset originally cost/depreciation/sold for

Rent expense needs to be increased by the amount of the gain. The outstanding lease payments should be presented as a debt like item.

Type of asset? Classification? Is the lease at a market rate? Presumably this was assessed to see if it was a sale leaseback based on your discussion of the deferred profit? Did they document why it wasn’t a failed sale leaseback resulting in a secured borrowing? Historically a lot of folks got this one wrong given the esoteric nature of the guidance. Presuming your example means they achieved sale accounting and deferred some of the profit? If an operating lease and they have minimum non-cancelable rental periods it may make sense to include those as a debt-like item as they wouldn’t show up on the balance sheet. If capital they’d already have the BS gross up reflecting the liability. Could see a QoE based on known cost synergies too I guess - especially if there is a plan to consolidate real estate. Hope this helps, but if you have questions it may make sense to loop in one of your AAS colleagues.

You’d need to make sure that an appropriate amount of expense is in the P&L with respect to the lease based on how the client intends to continue that relationship. The commitment would be debt like. Aka what manager 1 said

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