Parties:  The owner of the asset who is selling it and leasing it back is referred to as the seller/lessee

The party supplying the financing by purchasing the asset and leasing it back to the seller is referred to as the purchaser/lessor

General rule: No gain or loss should be recognized at the time of sale by the seller/lessee: there will be exceptions!

If the lease meets one of the four criteria for a capital lease, the lessee will account for the leaseback as a capital lease; otherwise as an operating lease.

If a capital lease, any gain on the sale should be deferred and amortized over the lease term or economic life, whichever is appropriate.

If an operating lease, any gain on the sale should be deferred and amortized in proportion to the rental payments over the period of time the assets are expected to be used by the lessee.

Exceptions to general rule:

Losses sometimes recognized immediately--when the fair value of the asset is less than the book value of the asset, a loss up to the difference between the book value and the fair value must be realized by the seller/lessee (see example No. 2)

FASB Statement No. 28 contains amendments to Statement No. 13 in cases where the seller/lessee relinquishes the right to substantially all of the remaining use of the property (retaining only a minor portion of such use) and where the seller/lessee retains more than a minor part but less than substantially all of the use of the property through the sale and leaseback. See Statement No. 28 for more details. (para. 2 and 3)