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Lease classification

ASC 842-10-55-10

Residual value guarantees of a portfolio of underlying assets preclude a lessor from determining the
amount of the guaranteed residual value of any individual underlying asset within the portfolio.
Consequently, no such amounts should be considered when evaluating the lease classification criteria
in paragraphs 842-10-25-2(d) and 842-10-25-3(b)(1).

Generally, when assessing the classification criteria, a lessor should not include residual value
guarantees when it applies to a portfolio of leased assets (unless they represent a single lease
component) because the classification analysis is performed on an asset by asset basis and it is not
possible to determine the amount of the guaranteed residual value for each individual asset.

A pooled residual value guarantee covering multiple leases can rarely be included in the assessment of
the lease payments criterion when determining lease classification. The guidance in ASC 842-10-55-10
was largely carried forward from ASC 840. Under limited circumstances, however, the “portfolio
effect” observed in ASC 842-10-55-9 may not exist for groups of leased assets that are similar.
Consequently, and consistent with how practice evolved in this area under ASC 840, we believe it may
be acceptable for a lessor to consider a pooled residual value guarantee in the assessment of the lease
payments criterion if the following characteristics exist:

□ Each of the leases commence at the same time

□ The ends of the lease terms are contemporaneous

□ The leased assets are physically similar to one another

□ The variability around the expected residual values is expected to be highly correlated

The classification of a lease that includes a residual value guarantee that applies to a portfolio of leased
assets by a lessee is not addressed by ASC 842. Generally, we believe a lessee should include the full
amount of the potential payment payable under a residual value guarantee to each of the individual
assets (unless they represent a single lease component) because the classification analysis is
performed on an asset by asset basis and it is not possible to determine the amount of the guaranteed
residual value for each individual asset. However, under limited circumstances, if the four
characteristics noted above are present, we believe it may be acceptable for a lessee to include a ratable
allocation of the potential payment payable under the residual value guarantee to the individual assets
within the portfolio.

3.3.4.5 Fair value of the underlying asset

The lease payments criterion requires a lessee and lessor to compare the present value of lease
payments and any residual value guaranteed by the lessee to the fair value of the underlying asset. The
ASC 842 Glossary provides the following definition of fair value.

Definition from ASC 842 Glossary

Fair value (second definition): The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.

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