Academic journal article Journal of Accountancy

Letters of Credit for Sale-Leaseback Transactions

Academic journal article Journal of Accountancy

Letters of Credit for Sale-Leaseback Transactions

Article excerpt




This month's column discusses a recent consensus reached by the Financial Accounting Standards Board emerging issues task force (EITF or task force) concerning letters of credit issued in conjunction with a sale-leaseback transaction.

EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700

ISSUE NO. 90-20

This EITF issue, Impact of an Uncollateralized Irrevocable Letter of Credit on a Real Estate Sale-Leaseback Transaction, considers the effect of a letter of credit on sale-leaseback accounting under FASB Statement no. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate. The facts are these:

A seller-lessee (Company A) enters into a real estate sale and leaseback transaction with an unrelated buyer-lessor (Company B). The agreement appears to meet all the provisions necessary to recognize a sale of the property under Statement no. 98. (Sale-leaseback accounting allows the seller-lessee to record a sale and remove the property and related liabilities from the balance sheet and allows a gain or loss.)

However, in connection with the leaseback, Company B requires Company A to provide an irrevocable letter of credit securing a portion or all of the lease payments in the event of a lease default. Company A will not pledge any assets or collateral to the letter of credit's issuer. A continuing involvement by Company A would preclude sale-leaseback accounting under Statement no. 98.

Accounting issue. The issue is whether the letter of credit constitutes a form of continuing involvement (other than the "normal leaseback") that would preclude the use of sale-leaseback accounting by Company A. …

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