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Accounting for leases

asset risk) into credit risk. Consequently, the most faithful representation of a lessor’s involvement in a
lease that transfers substantially all of the risks and rewards incidental to ownership of the underlying
asset to a lessee is to recognize the lessor’s financial net investment in the lease and recognize financial
(interest) income on that net investment over the lease term. The following sections discuss initial
recognition for the lessor.

4.3.1 Sales-type lease

A lessor should classify a lease that meets any of the criteria in ASC 842-10-25-2 as a sales-type lease.
In a sales-type lease, the lessor transfers control of the underlying asset to the lessee.. Accordingly, the
lessor should derecognize the leased asset and record its net investment in the lease at lease
commencement (consistent with the principle of a sale in ASC 606). As discussed in ASC 842-30-30-1,
the net investment in the lease consists of the lease receivable and the unguaranteed residual asset.

The unguaranteed residual asset is the present value of the lessor’s estimated value of the leased asset
returned to it at the end of the lease term, less a residual value guarantee, if any. There is no
unguaranteed residual asset for the lessor when the lessee retains the underlying asset at the end of
the lease term, as would be the case when a lease either transfers ownership to the lessee or a purchase
option is reasonably assured of exercise.

ASC 842-30-30-1 describes the measurement of a lessor’s net investment in a sales-type lease.

ASC 842-30-30-1

At the commencement date, for a sales-type lease, a lessor shall measure the net investment in the
lease to include both of the following:

a. The lease receivable, which is measured at the present value, discounted using the rate implicit in
the lease, of:
1. The lease payments (as described in paragraph 842-10-30-5) not yet received by the lessor

2. The amount the lessor expects to derive from the underlying asset following the end of the lease
term that is guaranteed by the lessee or any other third party unrelated to the lessor. The
unguaranteed residual asset at the present value of the amount the lessor expects to derive from
the underlying asset following the end of the lease term that is not guaranteed by the lessee or
any other third party unrelated to the lessor, discounted using the rate implicit in the lease.

The lessor should recognize any profit or loss arising from the sale of the underlying asset (through the
lease).

Initial direct costs should be recognized as an expense unless the fair value of the underlying asset
equals its carrying amount (i.e., there is no selling profit or loss). When there is no selling profit or
loss, the initial direct costs should be deferred and recognized over the lease.

4.3.1.1 Selling profit / selling loss

At the lease commencement date, the lessor is required to calculate the selling profit or loss as (1) the
fair value of the underlying asset (or the sum of lease receivable and any prepaid lease payments by
lessee, if lower); minus (2) the carrying amount of the underlying asset net of any unguaranteed
residual asset; minus (3) any deferred initial direct costs of the lessor. The sales price in a sales-type

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