Sale and repurchase agreements — put options (paper 2E)

The Boards continued their deliberations on the revenue ED and made the following tentative decision as summarised below:

• The Boards tentatively agreed with the recommendation that if a customer has the unconditional right to require the entity to repurchase the asset (a put option) and the repurchase price is below the original sales price and the customer obtains the control of the assets, the sale and repurchase agreement should be accounted for as a lease but asked the staff to revise the wording to add clarity by including references to a time factor and that there should be a significant economic incentive for the customer to return the asset.

Sale and repurchase agreements — put option

The ED currently provides that if a customer has the unconditional right to require the entity to repurchase the asset (a put option), the customer obtains the control of the asset, and the entity should account for the agreement similarly to the sale of the product with a right of return. The staff recommended that a sale and repurchase agreement with a put option and a repurchase price below the original sales price should be accounted for as a lease. When the repurchase price is at the original sales price, the staff recommended that the put option should be accounted for as a sale with a right of return.

This was in response to some of the respondents' comments that the repurchase price of a put option is not always at, or near to the original sales price and that in some industries, this arises because the put option is not exercisable until a reasonable period of time after the original sale and that in some instances, the repurchase price is lower than the original sales price, because the asset will not be returned in the same condition it was sold. Therefore the customer can be viewed as having a right to use the asset until the put option becomes exercisable, at which point the customer can choose to keep the asset or sell it back to the entity. Such instances would appear economically to be more like a lease than a right of return. The staff raised concerns that there might currently be an arbitrage between the lease standard and the revenue standard. Several Board members expressed concerns that the staffs' recommended wording did not explicitly cover a time factor or wear and tear factor or circumstances where the repurchase price was clearly below estimated market value which would indicate that there was a sale rather than a lease transaction. The Boards tentatively agreed with the recommendation in principle but asked the staff to revise the wording to add clarity by including references to a time factor and that there should be a significant economic incentive for the customer to return the asset. In such circumstances, the revenue standard would then require the entity to apply the leasing model in the lease standard. Certain Board members noted that this may give rise to situations in which the revenue standard would refer the entity to the lease standard even though the entity's products/services (such as intangible assets) are scoped out of the lease standard. In such circumstances, the revenue standard would take precedence and the entity would apply the leasing model in the lease standard.