 Hello and welcome to this session. This is Professor Farhad in which we will discuss sales leaseback agreement. In my opinion, the best way to learn sales leaseback is to learn the purpose of the sales leaseback agreement. So what is the purpose? The purpose is to raise money, is to raise capital, is to bring money to the company because we need money to operate. Well, there are some ways that you can raise money, some common ways, and that's issuing stocks or borrowing money through that. Those are the traditional method that company uses. Or a company can sell an asset or assets that they don't need. Or if they need the asset, they can mortgage the assets. That's why they keep it, but they mortgage the asset. How about we have a sales leaseback agreement? What is a sales leaseback agreement? It's where the company sells their assets, then they lease it back because they need to operate. A case in point is United Airline. United Airline sold 22 planes, then lease those 22 planes back from the Bank of China to be specific in a bid to conserve cash during the coronavirus pandemic and that's April 19, 2020. So this is what a sales leaseback is. So United Airline sold those airplanes to the Bank of China. The Bank of China does not operate those planes. They don't need the plane. They sold it. Bank of China gave them the money, then they lease back the planes to them. It's basically an arrangement to raise money. That's what a sales leaseback is. So in a sales leaseback agreement, the company, which is in this situation United, is the seller and the less see at the same time. They transfer an asset to another company, then lease that asset back or those assets 22 plane from the buyer, from the less sore from the Bank of China. From an accounting perspective, we have to determine whether this is a sale, an actual sale or a financing agreement. So from an accounting, this is what we have to determine. How do we determine it's a sale? If control passed from the seller to the buyer, if the control passed, then we have a sale. Then we consider this as a sale. If no control, if control did not pass, then we don't have a sale. We have a financing arrangement. It's called a failed sale. Now, we have to understand that if a sale took place, think about what happened when a sale takes place. When a sale takes place, cash goes up. You receive cash. The asset is removed. You sold the asset. You do recognize the asset along obviously accumulated depreciation. You would record any gain or loss. If you sold something, an asset, well, it's going to have a book value. It's going to have proceeds in return. The difference between the cash you received and the book value of this asset would result in either a gain or a loss. The best way to illustrate this concept is to work an example. Now, before we work an example, most likely you are an accounting student or a CPA candidate that's looking to learn more about sales leaseback agreement. That's great. You have arrived. That's why you are watching. I want you to go a step further. Go to farhatlectures.com where I'm going to have additional resources for you, multiple choice, true or false, exercises that's going to help you do better on your CPA exam as well as your accounting courses. I don't replace your CPA exam. You keep it. That's fine. I'm a useful addition. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording. If you're watching like it, it's going to help you. It's going to help others connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at an example. Adam company needs money to grow his business. Well, so Adam sells one of its building, have a carrying value of 680. The building has a cost of a million, less accumulated depreciation of 320 to Vikram for 720,000. Then Adam leases back the building from Vikram for $60,000 a year. And it's for eight years. And the building has a 15 year economic life. And let's assume the present value of the lease payment equal to 405. No, because here we are focusing on the journal entries for the leaseback agreement. And it's failed the finance lease. So this is not a finance lease. We're going to read this as an operating lease. Well, what's going to happen is this. We're going to receive the cash 720. We're going to remove the asset and its accumulated depreciation. And it has a book value of 680. Vikram gave us 720. We're going to book again of 40,000. Now sales leaseback used to be much, much more complicated based on the prior rules. We don't have to worry about the prior rules, but this is how we deal with it now. Also, what we have to do as an operating lease, we have to debit right of use asset 405, which is the present value of the obligation and the lease liability 405 and treat this as an operating lease. Now let's assume the transaction is a failed sale. It means it did not transfer. There was no transfer of control. Well, Adam will not remove the asset because there is no need to because there is no sale that took place. There is no transfer of control. Matter of fact, we keep depreciating the asset. We still have the asset. There is no gain and no loss. Why? Because we did not sell it. It's simply a financing transaction. And in a financing transaction, you receive the cash. Thank you very much, Vikram. And we credit the liability. We have a notes payable that we have to pay. Then we treat this as a notes payable transaction. We have an amortization schedule based on the interest rate. We make the payment, part of its interest, part of it, part of it principle. What should you do now? Go to farhatlectures.com, complete multiple choice through false questions that's going to help you understand this topic better, whether you are a student or a CPA candidate. Good luck, study hard, and of course, stay safe.