What is the accounting treatment for a sale and leaseback if the risks and rewards are not transferred?

In a sale and leaseback transaction where the risks and rewards of ownership of the asset are not transferred to the buyer/lessee, the asset remains on the seller/lessee's balance sheet as a financial liability. The cash received from the sale is recorded as a financing transaction rather than a revenue-generating activity.

When the sale occurs, since ownership is not fully transferred, the lessee (seller of the asset) recognizes a financial liability equivalent to the proceeds from the sale. This financial liability represents the obligation to make lease payments in the future since the asset has not been derecognized and the seller retains the right to use it under the lease agreement.

This treatment aligns with the requirements of relevant accounting standards, which dictate that a leaseback where risks and rewards remain with the seller should not result in the derecognition of the asset, but rather an acknowledgment of the liability arising from the lease obligations. Therefore, the correct accounting treatment involves debiting cash for the proceeds received and crediting a financial liability to reflect the obligation.