A seller transfers equipment to a customer and simultaneously enters into a separate agreement giving the seller the unconditional right to repurchase the equipment at a fixed date and at a repurchase price equal to or greater than the original selling price. Under ASC 606-10-55-66, how should this arrangement be accounted for?
- As a completed sale of the equipment, with revenue recognized in full at the date of initial transfer
- As a financing arrangement, in which the seller continues to recognize the asset and records the amount received from the customer as a financial liability
- As a sale with a right of return, recognizing revenue net of an estimated returns allowance
- As a lease of the equipment to the customer, with the seller recognizing lease income over the repurchase period
Why B? And why not the others?
Correct answer: B. As a financing arrangement, in which the seller continues to recognize the asset and records the amount received from the customer as a financial liability
ASC 606-10-55-66 provides that when an entity has an obligation or right to repurchase an asset (a forward or a call option) and the repurchase price is equal to or greater than the original selling price, the arrangement is accounted for as a financing arrangement rather than a sale, because the customer has not obtained control of the asset — control requires the ability to obtain substantially all the remaining benefits and direct the use of the asset, which is undermined when the seller retains an unconditional right to reclaim it at a price at or above what it sold for. Under that financing treatment, the seller continues to recognize the equipment on its own books and records the cash received from the customer as a financial liability, with the difference between the amount received and the amount to be repaid recognized as interest expense over the term. Recognizing a completed sale with full revenue at transfer contradicts the standard's explicit instruction that this fact pattern is not a sale at all. A right-of-return model applies to a different arrangement, where the customer has an option to return a product it purchased, not to a seller-controlled repurchase obligation or call option that never actually transfers control to begin with. Lease accounting applies when a contract conveys the right to control the use of an identified asset for a period in exchange for consideration, which is a different transaction structure from a repurchase agreement governed by ASC 606's specific repurchase-agreement guidance.
Source: FASB Accounting Standards Codification: ASC 606-10-55-66, Revenue from Contracts with Customers — Repurchase Agreements