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Accounting for leases

ASC 842-30-25-4

When collectibility is not probable at the commencement date, at the date the criterion in paragraph
842-30-25-3(a) is met (that is, the date at which collectibility of the lease payments plus any amount
necessary to satisfy a residual value guarantee provided by the lessee is assessed as probable), the
lessor shall do all of the following:

a. Derecognize the carrying amount of the underlying asset

b. Derecognize the carrying amount of any deposit liability recognized in accordance with paragraph
842-30-25-3

c. Recognize a net investment in the lease on the basis of the remaining lease payments and
remaining lease term, using the rate implicit in the lease determined at the commencement date

d. Recognize selling profit or selling loss calculated as:

1. The lease receivable; plus

2. The carrying amount of the deposit liability; minus

3. The carrying amount of the underlying asset, net of the unguaranteed residual asset.

ASC 842-30-25-5
When collectibility is not probable at the commencement date, at the date the criterion in paragraph
842-30-25-3(b) is met, the lessor shall derecognize the carrying amount of any deposit liability
recognized in accordance with paragraph 842-30-25-3, with the corresponding amount recognized as
lease income.

When collectibility of the lease receivable from a sales-type lease is not probable at the original
commencement date, the lessor should defer the recognition of the sale until collectibility becomes
probable. This is consistent with the collectibility guidance in ASC 606, which similarly states that a
supplier should defer recognition of a sale to a customer if collectibility of the consideration is not
probable.

In such circumstances, a lessor should not derecognize the underlying assets at the lease
commencement date, and should not recognize a net investment in the lease and selling profit or loss
(other than initial direct costs). Instead, it should recognize all lease payments received as a deposit
liability until the earlier of when collectibility becomes probable or the contract is terminated or
completed and the lease payments it received are nonrefundable. Initial direct costs associated with
the lease should be expensed at the original lease commencement date. During this period, the lessor
should not recognize interest expense on the deposit liability, and it should continue to depreciate the
underlying asset.

When collectibility subsequently becomes probable, a lessor should derecognize the carrying amount
of the underlying asset and deposit liability from its balance sheet and recognize the net investment in
the lease as well as any selling profit or loss. After making these adjustments, a lessor should follow the
subsequent measurement guidance for a sales-type lease (see LG 4.5.1).

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