What does a seller-lessee do if the sale proceeds are below fair value?

When a seller-lessee receives sale proceeds that are below the fair value of the asset sold, they consider the difference as a prepayment of lease payments. This situation arises because the seller-lessee is essentially still gaining an economic benefit from the asset through the lease while not recognizing the full amount of sale proceeds that would be expected under normal circumstances.

In this scenario, the lower sale proceeds suggest that the transaction involves an implicit financing arrangement. The seller-lessee may have still arranged to retain some form of control over the asset through the leaseback arrangement. As a result, the seller-lessee needs to recognize the shortfall as a prepayment of future lease payments, which reflects the economic reality that they are still deriving value from the asset despite the lower than expected sale price.

This approach ensures that the financial statements accurately portray the ongoing obligations and benefits associated with the asset, providing a clearer picture of the seller-lessee's financial standing. It reflects the principle that transactions should be recorded in a manner that depicts the substance of the arrangement rather than just the legal form.