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Accounting for leases

If the collection of lease payments or guaranteed residual value do not become probable before the
contract is terminated, or it repossesses the underlying asset and the lease payments are
nonrefundable, a lessor should derecognize the carrying amount of any deposit liability recognized
with the corresponding amount recognized as lease income. The lessor should continue to apply the
impairment guidance in ASC 360 to the underlying asset.

ASC 842-30-25-6
If collectibility is probable at the commencement date for a sales-type lease or for a direct financing
lease, a lessor shall not reassess whether collectibility is probable. Subsequent changes in the credit
risk of the lessee shall be accounted for in accordance with the impairment guidance applicable to the
net investment in the lease in paragraph 842-30-35-3.

If the collectibility of lease payments and any residual value guarantee is deemed to be probable at the
commencement date, any subsequent deterioration in the lessee’s credit quality will not require a
lessor to change its accounting or classification of a lease. However, the lessor’s net investment in the
lease would be subject to the financial instruments impairment guidance in ASC 310 and any
deterioration in the credit quality of the lessee should be captured through an impairment charge.
However, a lessor should consider the guidance for credit losses in ASC 326, Financial Instruments -
Credit Losses, once that guidance is adopted. See LG 4.7 for further discussion on impairment.

4.3.1.4 Examples – lessor accounting for sales-type leases

Example 4-7, Example 4-8 and Example 4-9 illustrate a lessor’s accounting for a sales-type lease.

EXAMPLE 4-7

Sales-type lease recognition – non-specialized digital imaging equipment lease (lessor)

Lessor Corp enters into a lease of non-specialized digital imaging equipment with Lessee Corp on
1/1/X9. Lessor Corp is a manufacturer of digital imaging equipment that uses both direct sales and
leases as a means of selling its products. The following table summarizes information about the lease
and the leased assets.

Lease term 5 years, no renewal option

Economic life of the leased
equipment 6 years

Purchase option None

Annual lease payments $1,100

Payment date Annually on January 1 (first payment is made at lease
commencement)

Fair value of the leased equipment $5,000

Lessor Corp’s carrying value of the
leased equipment $4,500

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