A finished ACC-685 Topic 7 failed sale-leaseback position memo example, applying the classification and repurchase-option tests to a plant sale, recording a $40 million liability and rejecting an $18 million gain. Searches like "acc 685 topic 7 assignment example", "acc685 topic 7 sample" and "acc-685 topic 7 example" land here.
What a finished ACC-685 Topic 7 failed sale-leaseback position memo looks like
The memo's first line gives the conclusion: the transfer fails as a sale, so the $40 million received is a financial liability and no gain is recognized. Amounts are illustrative. The processor sold its plant, carried at $22 million, to a real estate investor for $40 million and leased it back for 15 years at $3.0 million a year, keeping an option to repurchase in year ten for $44 million. The memo then walks ASC 842-40 in order. Sale accounting needs control to pass under ASC 606, and a repurchase option blocks that unless the price is fair value at exercise and substantially similar assets are readily available. Neither condition holds for a fixed price on a specialized plant. Management's reading, a sale because the option will never be exercised, is stated in full and answered.
How an ACC-685 Topic 7 example is structured
Each step of the memo pairs a requirement in the guidance with the contract term that meets or fails it. The opening states the conclusion and its effect on the statements. The facts section quotes the purchase agreement, the lease and the option clause, since the answer turns on their exact wording. The analysis takes the steps in the order the guidance sets: whether a contract exists, whether the leaseback would be a finance lease, and whether the repurchase option prevents control from passing. The alternative section argues management's view at full strength, including the processor's stated intention not to exercise. Accounting follows, with the plant kept at $22 million and still depreciated, the $40 million liability and the split of each payment. A comparison table shows both balance sheets and both income statements. A closing paragraph drafts the disclosure.
The conclusion before the walk
Stating in the first line that no sale occurred lets a reviewer read every later step as support for a position rather than as a search for one.
Leaseback classification checked first
A 15-year leaseback of a plant with a much longer life, with no purchase option the processor is reasonably certain to exercise, is not a finance lease.
The repurchase option decides the question
A fixed $44 million price is not fair value at exercise, and no substantially similar plant is readily available, so the option prevents control from transferring.
Management's reading argued at full strength
The processor's stated intention never to exercise is treated seriously, then shown to matter for lease classification but not for whether a sale occurred.
A financial liability in place of a gain
The $40 million becomes a liability repaid through the lease payments, and the plant stays on the balance sheet at $22 million, depreciated as before.
Two sets of statements compared
Sale accounting would report an $18 million gain and a lease liability, while the failed sale reports no gain and a $40 million financing obligation.
Where marks go in ACC-685 Topic 7
Memos that announce a failed sale and stop lose the most, since the conclusion is worth little until each requirement has been matched to the clause that meets or fails it. The opposite weakness is a memo recognizing the $18 million gain because the option is unlikely to be exercised, applying a probability test the guidance does not contain for repurchase options. Papers that skip the finance lease question leave one route to the same conclusion unexamined. Treating the failed sale as a sale with a note attached, keeping the gain and disclosing the option, misstates the balance sheet and reported income alike. Some memos derecognize the plant in the failed case, removing an asset the processor still controls. Marks also go when the alternative is never stated, since a reviewer cannot tell whether it was considered.
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ACC-685 Topic 7 questions, answered
Why does a repurchase option prevent a sale?
Because a seller that can buy the asset back has not given the buyer the ability to direct its use and obtain substantially all its remaining benefits, which is what control means under ASC 606. ASC 842-40 allows sale accounting despite a repurchase option only when the exercise price is the asset's fair value at exercise and alternative assets that are substantially the same are readily available in the marketplace.
Why does the processor's intention matter for one test and not the other?
Lease classification asks whether the lessee is reasonably certain to exercise a purchase option, so intention and economic incentive are evidence there. The sale test asks whether the seller holds a repurchase right at all, and the guidance does not weigh how likely exercise is. The memo keeps the two questions apart because management's argument depends on blending them.
What does the failed sale do to reported leverage?
It keeps the plant on the balance sheet and adds the $40 million received as a financial liability, so obligations rise by the full proceeds rather than by the smaller lease liability sale accounting would show. Covenants defined on reported debt may be affected, and the memo's disclosure paragraph explains the arrangement so lenders and investors can see what the liability represents.