What happens if the criteria for a sale are not met in a sale-leaseback transaction?

In a sale-leaseback transaction, if the criteria for recognizing a sale are not met, the transaction is treated as a failed sale and classified as a financing transaction. This is because, in order to recognize a sale, the seller must transfer control of the asset to the buyer. If the risks and rewards of ownership have not effectively shifted away from the seller, then the transaction cannot be accounted for as a sale. Instead, it remains on the seller's balance sheet, treated as a financing arrangement.

In such cases, the seller retains the asset and continues to recognize it on their financial statements, demonstrating the ongoing ownership despite the lease arrangement. The seller typically must also recognize a liability for the lease payments regarding the financing aspect of the transaction, but the asset will not be derecognized as it would in a successful sale.

This classification ensures that the financial statements accurately reflect the economic reality of the transaction, where the seller has not truly relinquished ownership of the asset.