Intercompany Guarantee of Lease Payments in a Sale-Leaseback and Transfer of Excess Pension Assets to Retiree-Healthcare Benefits Account
By MOSHE S. LEVITIN, CPA, senior technical manager, and LINDA A. VOLKERT, CPA, technical manager, of the AICPA technical information division. INTERCOMPANY GUARANTEE OF LEASE PAYMENTS IN A SALE-LEASEBACK AND TRANSFER OF EXCESS PENSION ASSETS TO A RETIREE HEALTHCARE BENEFITS ACCOUNT This month's column discusses a recent consensus reached by the Financial Accounting Standards Board emerging issues task force (EITF or task force) concerning the effect on sale-leaseback accounting of a parent's unsecured guarantee of its subsidiary's lease payments. The column also discusses the FASB staff's responses to questions received on accounting for the transfer of excess pension assets to a retiree healthcare benefits account or plan. EITF Abstracts, copyrighted by the FASB, is available in softcover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 068565116. Phone: (203) 847-0700. ISSUE NO. 90-14 This EITF issue, Unsecured Guarantee by Parent of Subsidiary's Lease Payments in a Sale-leaseback Transaction, interprets the "continuing involvement" criteria in FASB Statement no. 98, Accounting Leases: Sale-leaseback Transactions Involving Real Estate. The facts are these: Subsidiary S (seller-lessee), a wholly owned subsidiary of Company A, enters into a sale-leaseback transaction for a building with Company B (buyer-lessor). The transaction meets all FASB Statement no. 98 provisions for Subsidiary S to use sale-leaseback accounting, except Company B requires Company A (the subsidiary's parent) to guarantee the lease payments. Under sale-leaseback accounting for real estate, the seller-lessee records the sale, removes all property and any related liabilities from its balance sheet and recognizes a gain or loss on the sale. The leaseback is classified as either a capital lease or an operating lease in accordance with FASB Statement no. 13, as amended, Accounting for Leases, paragraph 7. However, sale-leaseback accounting for real estate may be used only if three criteria are met. One of those criteria is the payment terms and other provisions of the sale-leaseback transaction must transfer all risks and rewards of ownership to the buyer-lessor. Such a transfer is demonstrated by the lack of continuing seller-lessee involvement (other than the normal leaseback). Some guarantees, including parent (related party) guarantees, are considered forms of continuing involvement as discussed in Statement no. 98, paragraph 12(d). Under this paragraph, continuing involvement exists if "the seller-lessee provides collateral on behalf of the buyer-lessor other than the property directly involved in the sale-leaseback transaction, the seller-lessee or a related party to the seller-lessee guarantees buyer-lessor would have no reason to request it. Some who would require sale-leaseback accounting in the consolidated financial statements also believe parallel treatment should be followed in the separate subsidiary financial statements. In their view, the authoritative support for this conclusion lies in paragraph 1 of Accounting Research Bulletin no. 51, Consolidated Financial Statements: "The purpose of consolidated financial statements is to present ... the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single company with one or more branches or divisions." Those who objected to sale-leaseback accounting by the consolidated group also objected to such accounting in the separate subsidiary financial statements. In their view, even a separate unsecured guarantee by the seller-lessee (that is, a guarantee by the subsidiary) of its own obligation for leaseback payments also could be viewed as precluding the subsidiary from accounting for the transaction as a sale-leaseback. …