Structuring a Lease to Avoid Liability Recognition
Johnson Pharmaceuticals needs cash. One option being considered by the board of directors is to sell the plant facilities to a group of venture capitalists and then lease the facilities back for a long term period with the option of repurchasing the plant facilities at the end of the lease. The chairman has commented that this option will provide Johnson Pharmaceuticals the needed cash but will result in a large lease liability on the balance sheet. As the chief financial officer, you comment that if the company carefully structures the terms of the lease agreement, it may be able to avoid recognizing the lease liability. The chairman has asked you to prepare a memo discussing the specific ways in which a lease agreement can be structured to avoid recognizing the liability on the balance sheet.