Intercompany guarantee of lease payments in a sale-leaseback and transfer of excess pension assets to retiree-healthcare benefits account.

By MOSHE S. LEVITIN, CPA, senior technical manager, and LINDA A. VOLKERT, CPA, technical manager, of the AICPA technical information division.

INTERCOMPANY GUARANTEE OF LEASE PAYMENTS IN A SALE-LEASEBACK AND TRANSFER OF EXCESS PENSION ASSETS TO A RETIREE HEALTHCARE BENEFITS ACCOUNT

This month's column discusses a recent consensus reached by the Financial Accounting Standards Board emerging issues task force (EITF or task force) concerning the effect on sale-leaseback accounting of a parent's unsecured guarantee of its subsidiary's lease payments. The column also discusses the FASB staff's responses to questions received on accounting for the transfer of excess pension assets to a retiree healthcare benefits account or plan. EITF Abstracts, copyrighted by the FASB, is available in softcover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 068565116. Phone: [phone].

ISSUE NO. 90-14

This EITF issue, Unsecured Guarantee by Parent of Subsidiary's Lease Payments in a Sale-leaseback Transaction, interprets the "continuing involvement" criteria in FASB Statement no. 98, Accounting

Leases: Sale-leaseback Transactions Involving Real Estate. The facts are these:

Subsidiary S (seller-lessee), a wholly owned subsidiary of Company A, enters into a sale-leaseback transaction for a building with Company B (buyer-lessor). The transaction meets all FASB Statement no. 98 provisions for Subsidiary S to use sale-leaseback accounting, except Company B requires Company A (the subsidiary's parent) to guarantee the lease payments.

Under sale-leaseback accounting for real estate, the seller-lessee records the sale, removes all property and any related liabilities from its balance sheet and recognizes a gain or loss on the sale. The leaseback is classified as either a capital lease or an operating lease in accordance with FASB Statement no. 13, as amended, Accounting for Leases, paragraph 7.

However, sale-leaseback accounting for real estate may be used only if three criteria are met. One of those criteria is the payment terms and other provisions of the sale-leaseback transaction must transfer all risks and rewards of ownership to the buyer-lessor. Such a transfer is demonstrated by the lack of continuing seller-lessee involvement (other than the normal leaseback).

Some guarantees, including parent (related party) guarantees, are considered forms of continuing involvement as discussed in Statement no. 98, paragraph 12(d). Under this paragraph, continuing involvement exists if "the seller-lessee provides collateral on behalf of the buyer-lessor other than the property directly involved in the sale-leaseback transaction, the seller-lessee or a related party to the seller-lessee guarantees buyer-lessor would have no reason to request it.

Some who would require sale-leaseback accounting in the consolidated financial statements also believe parallel treatment should be followed in the separate subsidiary financial statements. In their view, the authoritative support for this conclusion lies in paragraph 1 of Accounting Research Bulletin no. 51, Consolidated Financial Statements: "The purpose of consolidated financial statements is to present ... the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single company with one or more branches or divisions."

Those who objected to sale-leaseback accounting by the consolidated group also objected to such accounting in the separate subsidiary financial statements. In their view, even a separate unsecured guarantee by the seller-lessee (that is, a guarantee by the subsidiary) of its own obligation for leaseback payments also could be viewed as precluding the subsidiary from accounting for the transaction as a sale-leaseback. To do otherwise would be inconsistent with the theory behind Statement no. 98, which is to prohibit any form of continuing involvement not specifically permitted by the statement. They believe a guarantee, even by the seller-lessee, is an additional commitment (and thus represents continuing involvement) as long as someone is willing to provide better financing rates because of it.

Consensus. The EITF concluded an unsecured guarantee of the lease payments of one member of a consolidated group by another member of the consolidated group is not a form of continuing involvement that precludes sale-leaseback accounting under Statement no. 98 in the consolidated financial statements. In the EITF's view, such unsecured guarantees do not provide the buyer-lessor with additional collateral that reduces risk of loss, except in the event of the seller-lessee's bankruptcy.

However, the EITF reached a different conclusion for the separate financial statements of the seller-lessee. It said sale-leaseback accounting would be precluded in that case under Statement no. 98, because such a guarantee provides the buyer-lessor with additional collateral, which reduces the buyer-lessor's risk of loss.

OTHER TECHNICAL MATTERS A t the EITF's March 1991 meeting, an FASB representative said the FASB staff had received several inquiries about the proper accounting for the qualified transfer of excess pension assets to a retiree healthcare benefits account. Such a transfer may be effected pursuant to the Revenue Reconciliation Act of 1990 (RRA).

The RRA permits the transfer of certain excess pension assets to a healthcare benefits account on a tax-free basis without other penalties. Specifically, under the RRA, an employer can make a qualified transfer of excess pension assets of a defined benefit plan (other than a multiemployer plan) to a healthcare benefits account that is part of the pension plan [a section 401(h) account]. The transfer can be made without including the transferred amount in the employer's gross taxable income and without incurring the 20% excise tax that would be required for an employer reversion under Internal Revenue Code section 4980 (or a 50% excise tax if there is no replacement plan).

To qualify, (1) the transfer must occur in a plan year beginning after December 31, 1990, but before the employer's 1996 tax year and (2) the amount of the pension assets transferred must not exceed the amount reasonably expected to be paid out of the account for qualified current retiree health liabilities." No more than one transfer per year is permitted.

The FASB representative said the transfer of excess pension assets to a retiree healthcare account or plan (whether or not the transfer of assets is made pursuant to the RRA) should be recognized by the employer as a negative contribution to (withdrawal of funds from) the pension plan and a positive contribution to the retiree healthcare plan. No gain or loss arises from the transfer of the excess pension assets.

EXECUTIVE SUMMARY

EITF Issue no. 90-14 Accounting problem: Does an unsecured guarantee by a parent of its subsidiary's lease payments in a sale-leaseback transaction preclude sale-leaseback accounting in

1. The consolidated financial statements?

2. The subsidiary's separate financial statements? Consensus 1: No, in the consolidated financial statements.

Consensus 2: Yes, in the subsidiary's separate financial statements.

Other technical matters Accounting problem: Should a gain or loss be recorded by the employer on the transfer of excess pension assets to a retiree healthcare benefits account or plan?

FASB staff response: No.