Sale and Leaseback Agreements
A sale and leaseback occurs when a company sells an asset it owns to another party and simultaneously leases it back. In a sale and leaseback, two things happen:
1. The lessee receives cash from the sale of the asset.
2. The lessee continues to use the asset. Often, with a sale and leaseback, the lessee may have the option to repurchase the leased asset at the end of the lease.
An example of a sale and leaseback occurred in August of 2001 when the Malaysian government announced that it was setting up a company to buy aircraft owned by Malaysian Airlines and lease them back. The goal was to strengthen Malaysian Airlines’ financial position by providing it with needed cash. In fact, sale and leaseback agreements often are arranged for this purpose.
CONCEPT QUESTIONS
a What are the differences between an operating lease and a financial lease?
b What is a tax oriented lease?
c What is a sale and leaseback agreement?