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Chapter 4: Accounting for finance leases
Recognition and initial measurement
The lessor recognizes assets held under a finance lease in its balance sheet at commencement date. It presents them as a receivable at an amount equal to the net investment in the lease.
A lessor’s net investment in a lease is its gross investment in the lease, discounted at the interest rate implicit in the lease. The gross investment in the lease is equal to the lease payments receivable by the lessor, plus any unguaranteed residual accruing to the lessor. At any time during the lease term, the net investment in the lease will represent the remaining lease payments less that part of the lease payments that is attributable to future gross earnings (namely, interest) and the unguaranteed residual value. The unguaranteed residual value, which is typically small in a finance lease, represents the amount that the lessor expects to recover from the value of the underlying asset at the end of the lease term that is not guaranteed in any way by either the lessee or third parties.
The lessor uses the rate implicit in the lease to calculate the net investment in the lease. The implicit rate is the rate of interest that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of the fair value of the underlying asset and any initial direct costs of the lessor. If the intermediate lessor is unable to determine the rate implicit in a sub-lease, it can apply the discount rate used for the head lease, adjusted for any initial direct costs associated with the sub-lease.
The lessor includes the following lease payments in the measurement of the net investment in the lease, provided that it has not received them at the commencement date: fixed payments (including in-substance fixed payments), less any lease incentives payable; variable lease payments that depend on an index or a rate, initially measured using the index or the rate at the commencement date; residual value guarantees provided to the lessor by the lessee, a party related to the lessee, or a third party unrelated to the lessor that is capable of discharging the obligations under the guarantee; the exercise price of a purchase option (if the lessee is reasonably certain to exercise that option); and payments of penalties for terminating the lease (if the lease term reflects the lessee exercising the option to terminate the lease).
Unguaranteed residual value is the “… portion of the residual value of the underlying asset, the realization of which by a lessor is not assured or is guaranteed solely by a party related to the lessor”. Unguaranteed residual values can have a significant impact on the profitability of a lease transaction for a lessor.
Q&A: What does the estimated unguaranteed residual value depend on?
The estimated unguaranteed residual value will depend on specific factors: The nature of the asset under consideration. The known volatility of second-hand values. The rate of technological change. Competitive conditions. The asset’s economic life relative to the lease term.
For both finance leases and operating leases, the lessor will have to estimate the unguaranteed residual value at the end of the lease. However, the accounting treatment of unguaranteed residuals will depend on the classification of the lease.
Lessors often incur initial direct costs in negotiating and arranging a lease (for further guidance on the definition of initial direct costs). The definition in IFRS 16 is consistent with the definition of incremental costs of obtaining a contract in IFRS 15.
Initial direct costs (other than those incurred by manufacturer or dealer lessors) are included in the initial measurement of the net investment in the lease, through the definition of the interest rate implicit in the lease. The definition ensures that they are automatically included in the finance lease receivable, and there is no need to add them separately. The amount of income that is recognized over the lease term is reduced by the impact of the initial direct costs.
Subsequent measurement
Rentals are apportioned between a reduction in the net investment in the lease and finance income over the lease term. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.
Q&A: Calculation of lessor finance income (example)
The method for allocating gross earnings to accounting periods is referred to as the ‘actuarial method’. The actuarial method allocates rentals between finance income and repayment of capital in each accounting period in such a way that finance income will emerge as a constant rate of return on the lessor’s net investment in the lease.
Lease term 7 years from 31 March 20X2
Rental payments C1,787 payable annually in advance
Fair value of the underlying asset C10,000
Unguaranteed residual value nil
Lessor’s year-end date 30 September
The first step is to calculate the interest rate implicit in the lease. The calculation of an annual interest rate of 8.1928% is shown below:
Date Cash Flows Interest
8.1928%Balance 31 March 20X2 10,000 – 10,000 31 March 20X2 (1,787) – 8,213 31 March 20X3 (1,787) 673 7,099 31 March 20X4 (1,787) 582 5,894 31 March 20X5 (1,787) 483 4,590 31 March 20X6 (1,787) 376 3,179 3,179 (1,787) 260 1,652 31 March 20X8 (1,787) 135 – (2,509) 2,509 This equates to a 6-monthly interest rate of 4.0158% ((1.081928) 1 / 2 = 1.040158).
Once the interest rate implicit in the lease is known, finance income can be allocated to the appropriate accounting periods:
Date Net investment at start of period Interest income at 4.0158 % Rental Net investment at end of period Annual finance income C C C C C C 30 September 20X2 8,213 330 – 31 March 20X3 3 343 (1,787) 30 September 20X3 1 285 – 31 March 20X4 1 297 (1,787) 30 September 20X4 3 237 – 31 March 20X5 2 246 (1,787) 30 September 20X5 2 colors 184 – 31 March 20X6 1 pair 192 (1,787) 30 September 20X6 1 128 – 31 March 20X7 1 133 (1,787) 30 September 20X7 1 66 – 31 March 20X8 1 68 (1,787) 30 September 20X8 1 – 2,509
The impairment and de-recognition requirements in IFRS 9 are applied to the net investment in the lease (for further information). The other requirements of IFRS 9 are not applied to the net investment in the lease.
The lessor reviews the estimated unguaranteed residual regularly. If there has been a reduction in the estimated unguaranteed residual value, it revises the income allocation over the lease term, and it recognizes immediately any reduction in respect of amounts already accrued.
Accounting for operating leases
A lessor should present assets subject to operating leases in its balance sheet according to the nature of the asset. Leased assets are usually presented as property, plant and equipment or investment property.
The lessor depreciates or amortizes underlying assets on a basis consistent with its normal policy for similar assets, in accordance with IAS 16 or IAS 38.
An entity applies IAS 36, in the same way as for assets that are owned by the entity, to determine whether an underlying asset has become impaired.
A lessor recognizes lease payments from operating leases as income on a straight-line basis over the lease term, unless another systematic basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. This is irrespective of when the payments are due. The use of a systematic basis other than straight-line is rare in practice.
Q&A: Lease income recognized on a straight-line basis (example)
Entities A and B operate in an inflationary environment of 6% over the last 12 months. Entity A (the lessor) enters into an operating lease agreement with entity B (the lessee). The term of the lease agreement is three years. The lease is fixed for C20, 000 per month for the first year, with an automatic fixed inflation adjustment of 6% at the end of years 1 and 2. Therefore, the lease rentals payable are fixed as follows:
Year 1: C20, 000 per month.
Year 2: C21, 400 per month.
Year 3: C23, 110 per month.
The lease rentals payable by the lessee are not linked to an inflation index. However, practice in the local economy is that these annual escalations reflect the potential increases in price levels over the period of the lease agreement. If the parties had to enter into annual lease agreements, it is unlikely that entity B would successfully negotiate to pay C20000 a month – as a result of inflationary increases, the monthly rentals payable would increase.
Should a fixed increase in lease payments stipulated in a lease agreement, which are a quasi-compensation for inflation-related increases, be recognized in the period in which they occur?
No. The fixed annual increases in lease payments are part of the lease payments, and they are spread on a straight-line basis over the lease term. The amounts are not discounted. Entity A recognizes a monthly rental income of C21503.33, which is the average of the three years’ lease payments.
Initial direct costs incurred by lessors in negotiating and arranging an operating lease are added to the carrying amount of the leased asset. These costs are recognized as expense over the lease term on the same basis as the lease income. Recognition of initial direct costs as an immediate expense is not acceptable. For further guidance on the definition of initial direct costs.
Q&A: Can a lessor capitalize costs which do not qualify as initial direct costs?
A lessor enters into a lease and incurs costs related to the leased tangible asset with a third party, for example to transport it to the location specified in the lease or to install it.
How should the lessor account for these costs?
The costs do not qualify as initial direct costs in IFRS 16 because they are not costs of obtaining the lease. The lessor should first consider whether any accounting standard applies to the costs, for example, IFRS 15, if the costs relate to a non-lease component. If these costs are not in the scope of any other accounting standard, IFRS 16 does not provide guidance on how to account for these costs. In our view the lessor has an accounting policy choice between either:
a) Analogizing to IFRS 15
Applying IAS 8, there is a similar and related issue in IFRS 15. If the costs could be capitalized in IFRS 15 as contract fulfilment costs, the lessor lessee can capitalize equivalent costs relating to a leased asset.
b) Expensing the costs as incurred IFRS 16 provides no guidance allowing these costs to be capitalized.
Considering the definition of expenses in the Conceptual Framework, these costs could be viewed as an increase in liabilities (trade creditors) which results in a decrease in equity, and therefore expensed as incurred. The policy chosen should be consistently applied and disclosed. If this choice represents a critical accounting judgement, the entity should consider the IAS 1 disclosure requirements.
The lessor accounts for a modification of an operating lease as a new lease. Any prepaid or accrued lease payments relating to the original lease are considered as payments for the new lease, and they are spread over the new term of the modified lease.
Manufacturer/dealer lessors
Manufacturer/dealer lessors are distinguished from other lessors. A manufacturer/dealer lessor is a lessor that either manufactures the leased asset or acquires the leased asset as part of its dealing activities. The main difference, compared to a normal lessor, is the cost at which the lessor acquires an asset for lease: the manufacturer/dealer obtains the asset at its cost of manufacture or at a wholesale price. Its cost will usually be below a normal selling price to other customers.
There is specific guidance on whether and to what extent manufacturer/dealer lessors recognize profit or loss at the commencement date of a lease.
A manufacturer/dealer lessor that enters into an operating lease does not recognize selling profit. The risks and rewards associated with the asset’s ownership have not passed to the customer, and the lease is not equivalent to a sale. The manufacturer/dealer accounts for the lease in the same way as any other operating lessor.
A manufacturer/dealer lessor that enters into a finance lease with a customer recognizes selling profit or loss in income as follows: revenue is the fair value of the underlying asset or, if lower, the present value of the lease payments accruing to the lessor, discounted using a market rate of interest; cost of sale is the cost, or carrying amount (if different), of the underlying asset, less the present value of the unguaranteed residual value; and selling profit or loss is the difference between revenue and the cost of sale, recognized in accordance with an entity’s policy for outright sales to which IFRS 15 applies.
Q&A: Sale of an asset by a manufacturer lessor with advance deposit payment by the lessee (example)
Entity A (a manufacturer lessor) signed an agreement on 1 January 20X8 to lease specific equipment to entity B (the lessee). Entity A committed to deliver the equipment to entity B on 1 January 20X9. Entity A will manufacture the equipment, and it estimates that the fair value will be C15,000. The estimated cost to build the asset is C10,000. The lessor has not incurred any initial direct costs in negotiating and arranging the lease. The term of the arrangement is four years, commencing when the equipment is delivered. The estimated useful life of the asset is four years and there is no residual value. The lessee is obliged to make an upfront payment of C5,000 on signing the contract and four annual payments of C2,619, payable on 1 January of each year. The first annual payment is due on 1 January 20X9.
Inception of the lease is on 1 January 20X8, when the lease agreement is signed, and commencement of the lease is on 1 January 20X9, when the underlying asset is made available for use to the lessee.
There is no detailed guidance on how to account for lease payments prepaid at inception but before the commencement date. In our view, at inception, the lessor recognizes the upfront payment of C5,000 as a liability and accretes it over the time between inception and commencement (when the asset is ready for use) of the lease. The upfront payment is, in substance, a prepayment or a loan that the lessee provides to the lessor during the construction period. The lessor should recognize finance expense as the upfront payment accretes until commencement.
Entity A determines the interest rate implicit in the lease on 1 January 20X8 by comparing the present value of lease payments discounted to 1 January 20X9 and the estimated fair value of the asset on 1 January 20X9 (in this example, the residual value and initial direct costs are assumed to be zero). Assuming that the interest rate implicit in the lease is 5%, the liability accretes over the time between inception and commencement (1 January 20X9) to C5,250. The accreted prepayment of C5,250 is treated as part of the lease payments.
At commencement of the lease on 1 January 20X9, the lessor is expecting to initially recognize a profit on disposal amounting to C5,000 and a finance lease receivable of C9,750, being the discounted amount of the future lease payments amounting to C15,000 less the set-off of C5,250 liability.
A manufacturer/dealer lessor recognizes selling profit or loss on a finance lease at the commencement date, regardless of whether the lessor has sold the underlying asset in accordance with IFRS 15.
Manufacturer/dealer lessors could quote artificially low rates of interest in order to attract customers. The selling profit is restricted to the amount that would result if a market rate of interest were charged.
A manufacturer/dealer lessor recognizes initial direct costs incurred in connection with the arrangement of a finance lease as an expense at the commencement of the lease term, because they mainly relate to earning the selling profit.
Property leases
A lessor considers the land and the buildings elements of a lease of land and buildings separately for the purpose of lease classification. The separate land and buildings elements of leases should be classified as finance leases or operating leases in the same way as leases of other assets. Leases that transfer substantially all of the risks and rewards incidental to ownership of the asset are classified as finance leases. All other leases are classified as operating leases.
A lease of land is usually classified as an operating lease (assuming that the ownership of the land is not transferred or is not expected to be transferred, through the exercise of a purchase option, to the lessee at the end of the lease term), because land normally has an indefinite economic life. However, a very long lease, such as a 999-year lease, could be a finance lease, because the significant risks and rewards associated with the land during the lease term have been transferred to the lessee. The lessee in a 999-year lease is in a position economically similar to an entity that has purchased the land and buildings. The present value of the property’s residual value would be negligible.
The lessor splits rentals payable under the lease between the two elements, if required, to classify each element as either an operating or a finance lease and, if the classification of the land and the buildings elements of the lease is different, to measure the leases.
Long-term leases of land
The Board considered, but decided against, a scope exclusion for long-term leases of land. Therefore, such leases should be accounted for in accordance with IFRS 16.
Leases of investment property
Unlike IAS 17, IFRS 16 contains no scope exclusions in relation to investment property. Therefore, all aspects of leases of investment property are accounted for under IFRS 16.
Consequential amendments arising from IFRS 16 have amended the definition of investment property in IAS 40 to include both owned investment property and investment property held by a lessee as a right-of-use asset. Under IFRS 16, if a lessee applies IAS 40’s fair value model to its owned investment property, it is also required to apply that fair value model to right-of-use assets that meet the definition of investment property.
An entity allocates lease payments (including any up-front lump sum payments) between the land and the buildings elements in proportion to the relative fair values of the leasehold interests at inception. The weighting should reflect the lessee’s leasehold interest in the land and the buildings.
It is normally possible to obtain a reasonable split of the lease rentals. However, the lessor might be unable to allocate lease payments reliably between the land and the building. The lessor in such cases should classify the entire lease as a finance lease, unless it is clear that both elements are operating leases.
The lessor can treat land and the buildings elements together for the purpose of lease classification if the land element is immaterial. In such cases, the economic life of the buildings is regarded as the economic life of the entire leased asset for classification purposes.
Sale and leaseback transactions
A sale and leaseback is a transaction in which the owner of an asset sells the asset and leases it back from the buyer. The seller-lessee must determine if the transaction qualifies as a sale for which revenue is recognized, or whether the transaction is a collateralized borrowing.
The accounting for sale and leaseback transactions depends on whether the transfer of the asset qualifies as a sale in accordance with IFRS 15. The potential seller-lessee applies the requirements for determining when a performance obligation is satisfied in IFRS 15 to make this assessment.
Q&A: When would a sale and leaseback not qualify as a sale in accordance with IFRS 15?
Entity A sells a building with 30 years’ remaining useful life to bank B for the market value of C100m. For the purpose of this example, disregard the lease of land. The entity then leases the building back from bank B and, over the next 10 years, entity A pays to bank B a C5m per annum rental.
At the end of year 10, entity A has the option to purchase back the building for C70m. Does this transaction qualify as a sale and leaseback?
Analysis
IFRS 15 specifies that “if an entity has an obligation or a right to repurchase the asset (a forward or a call option), a customer does not obtain control of the asset because the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset”. In this case, entity A’s option to repurchase the building means that it does not qualify as a sale in accordance with IFRS 15, and therefore it does not qualify as a sale and leaseback.
A sale and leaseback qualifies as a sale if the buyer-lessor obtains control of the underlying asset. The seller-lessee measures a right-of-use asset arising from the leaseback as the proportion of the previous carrying amount of the asset that relates to the right of use retained. The gain (or loss) that the seller-lessee recognizes is limited to the proportion of the total gain (or loss) that relates to the rights transferred to the buyer-lessor.
Any difference between the sale consideration and the fair value of the asset is either a prepayment of lease payments (if the purchase price is below market terms) or an additional financing (if the purchase price is above market terms). The same logic applies if the lease payments are not at market rates.
Q&A: Accounting for a sale and leaseback transaction (example)
A seller-lessee sells a building to an unrelated buyer-lessor for cash of C2,000,000. The fair value of the building at that time is C1,800,000; the carrying amount immediately before the transaction is C1,000,000. At the same time, the seller-lessee enters into a contract with the buyer lessor for the right to use the building for 18 years, with annual payments of C120,000 payable at the end of each year. The interest rate implicit in the lease is 4.5%, which results in a present value of the annual payments of C1,459,200. The transfer of the asset to the buyer-lessor has been assessed as meeting the definition of a sale under IFRS 15.
How is the transaction accounted for?
Since the consideration (C2,000,000) exceeds the fair value (C1,800,000) of the building, the agreement contains a financing transaction:
Cash C200,000
Financial liability C200,000
The seller-lessee initially recognizes a right-of-use asset as the proportion of the previous carrying amount (C1,000,000) that reflects the right of use retained. The proportion is calculated by dividing the present value of the lease payment (C1,459,200), less the part of the lease payments that is just a repayment of the financing granted to the seller-lessee (C200,000) [= C1,259,200], by the fair value of the asset (C1,800,000). This results in a right-of-use asset of C699,555.
The gain on sale is calculated as a proportion of the total gain of C800,000 (purchase price less financing element less carrying amount of the building), representing the ratio between the rights effectively transferred to the buyer (= fair value of the building (C1,800,000) less the present value of the lease payments (C1,259,200)) and the fair value of the building (C1,800,000). This results in a gain of C240,355.
The final accounting entries are as follows:
Cash C1,800000
Right-of-use asset C699555
Building C1,000000
Financial liability C1,259200
Gain C240355
The buyer-lessor accounts for the purchase in accordance with applicable standards (such as IAS 16, if the underlying asset is property, plant or equipment), and for the leaseback in accordance with IFRS 16.
If the transfer does not qualify as a sale under IFRS 15, the seller-lessee does not de-recognize the transferred asset, and it accounts for the cash received as a financial liability. The buyer-lessor does not recognize the transferred asset and, instead, it accounts for the cash paid as a financial asset (receivable).
The lessee accounts for a transaction as a sale and leaseback if it obtains control of an underlying asset before the asset has been transferred to the lessor. This situation might occur, for example, if a manufacturer, a lessor and a lessee negotiate a transaction for the purchase of an asset from the manufacturer by the lessor, which is in turn leased to the lessee, and the lessee obtains control of the asset before legal title is transferred to the lessor.
Embedded derivatives
IAS 39/IFRS 9 applies to derivatives that are embedded in lease contracts. Parties to a lease should review the terms carefully, to determine whether it contains an embedded derivative (for further information on embedded derivatives often found in leases and how to assess whether these are embedded derivatives).
Transition and effective date
IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application of IFRS 16 is permitted, but only in conjunction with IFRS 15. An entity is not allowed to apply IFRS 16 before applying IFRS 15.
The date of initial application is the beginning of the annual reporting period in which an entity first applies IFRS 16.
Definition
Entities are not required to re-assess whether existing contracts contain a lease on transition. An entity can elect to apply the guidance on definition of a lease only to contracts entered into (or changed) on or after the date of initial application. For all other contracts, it can retain the assessment made under IAS 17/IFRIC 4 (that is, their assessment is ‘grandfathered’).
If an entity chooses this expedient, it applies it to all of its contracts.
Lessee
Lessees can choose between a full retrospective application in accordance with IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, and a ‘simplified approach’. The approach chosen must be applied consistently to all leases.
Comparative information is not restated under the ‘simplified approach’. Instead, the cumulative effect of applying the standard is recognized as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application.
The table below illustrates the application of the ‘simplified approach’:
| Balance sheet item | Measurement |
| Leases previously classified as operating leases | |
| Lease liability | Present value of the remaining lease payments, discounted using lessee’s incremental borrowing rate at the date of initial application. |
| Right-of-use asset | Retrospective calculation, using a discount rate based on lessee’s incremental borrowing rate at the date of initial application. |
| or Leases previously classified as finance leases | |
| Lease liability | Carrying amount of the lease liability immediately before the date of initial application. |
| Right-of-use asset | Carrying amount of the lease asset immediately before the date of initial application. |
A lessee applying the ‘simplified approach’ must make additional disclosures, but it can use various practical expedients. For example, it is not required to apply the new lessee accounting model to leases for which the lease term ends within 12 months after the date of initial application. Instead, it is allowed to account for those leases as short-term leases.
Q&A: Impairment requirements for right-of-use assets resulting from leases previously classified as operating leases
A retailer leases 90 stores under leases that, under IAS 17, are classified as operating leases. Prior to the adoption of IFRS 16, the retailer decided that it would no longer use 18 of the stores for trading, but it would sub-lease them to third parties. It therefore assessed whether the underlying lease contracts were onerous, applying the guidance in IAS 37, and it concluded that, for 10 lease contracts, a provision for onerous contracts was needed. 72 contracts: No assessment made. 10 contracts: Assessment made; provision recognized. 8 contracts: Assessment made; no provision recognized. At transition to IFRS 16, the retailer chooses the ‘simplified approach’.
How does the retailer, at the date of initial application, assess whether the right-of-use asset recognized for each contract needs to be impaired?
The store is a separate cash-generating unit, as defined in IAS 36. Analysis At the date of initial application, the lessee has to assess whether the right-of-use asset that is recognized for each lease contract needs to be impaired. The way in which this test is performed depends on whether or not the lessee has already made an assessment based on IAS 37 before transition.
Contracts for which the entity has already made an assessment based on the guidance in IAS 37
For contracts for which the entity has already made an assessment based on the guidance in IAS 37 (in this example, 18 contracts), IFRS 16 allows it to rely on that assessment. If the entity decides to apply that practical expedient, it adjusts the right-of-use assets at the date of initial application by the amount of any provision for onerous contracts recognized immediately before the date of initial application.
Looking at the example, this means that:
The right-of-use assets that relate to the 10 stores for which a provision for onerous contracts has been recognized are reduced by an amount equal to the carrying amount of that provision.
The right-of-use assets that relate to the eight stores for which no provision for onerous contracts has been recognized are not adjusted; for them, no further impairment review has to be performed.
If the entity does not use the practical expedient, it has to apply the guidance in IAS 36. It will therefore have to assess whether, at the date of initial application, there is an indicator that an impairment loss has occurred (For example, because the rentals of the sub-lease differ from the rentals of the head lease). If this is the case, the entity has to calculate the recoverable amount of the right-of-use asset, in accordance with the guidance in IAS 36, and recognize an impairment if necessary.
If there is no indicator present, the entity does not have to calculate the recoverable amount.
Contracts for which the entity has not made an assessment based on the guidance in IAS 37
For contracts that have not already been assessed based on the guidance in IAS 37 (in this example, 72 contracts), we are of the view that the entity has an accounting policy choice. It can perform an assessment (as described in IAS 37) before transition to IFRS 16, and rely on the outcome of that assessment (that is, adjust the right-of-use asset by the amount of any provision for onerous contracts). Alternatively, it can apply the guidance in IAS 36 in the way described above.
Please note: The example above considered retail stores, where each right-of-use asset is also a cash-generating unit as defined in IAS 36. In a situation where the right-of-use assets are not also cash-generating units, an entity must still apply IAS 36 as normal, to determine when an impairment review is required and what the cash-generating units are.
Lessor
The lessor is not required to make any adjustments on transition, except for the re-assessment of existing operating sub-leases at the date of initial application.
The lessor re-assesses operating sub-leases on the basis of the remaining contractual terms and conditions of the head lease and the sub- lease. If operating sub-leases are now classified as finance leases, the lessor accounts for the sub-lease as a new finance lease entered into on the date of initial application.
Sale and leaseback transactions
An entity does not re-assess sale and leaseback transactions entered into before the date of initial application to determine whether or not the sale fulfilled the conditions of IFRS 15.
The seller-lessee continues to amortize any gain on sale over the term of the lease for a finance leaseback.
The seller-lessee accounts for any deferred gain or loss due to off-market terms as an adjustment to the leaseback right-of-use asset for an operating leaseback.