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Modification and remeasurement of a lease

Reassess lease classification based on the terms of the modified lease

Lessor Corp would conclude that the lease is a sales-type lease because the remaining lease term of six
years represents a major part of the remaining economic life of seven years.

Account for the modified lease

To account for the modified lease, Lessor Corp would recognize a net investment in the sales-type
lease of $1,000,000 (the fair value of the equipment on that date) and derecognize the net investment
in the original direct financing lease of $903,169. The difference between these two amounts ($96,831)
is the selling profit. See LG 4.3.1.1 for further details on accounting for selling profit.

After the modification, Lessor Corp would account for the lease in accordance with ASC 842-30, as it
would any other sales-type lease.

EXAMPLE 5-12

Modification of a direct financing lease that changes lease classification to an operating lease

On January 1, 20X1, Lessee Corp enters into a contract with Lessor Corp to lease non-specialized
digital imaging equipment.

The following table summarizes information about the lease and the leased assets at lease inception.

Lease term 5 years, no renewal option
Economic life of the leased
equipment 10 years

Purchase option None

Annual lease payments $195,000

Payment date Annually on January 1

Fair value of the leased equipment $1,200,000

Lessor Corp’s carrying value of the leased
equipment $1,200,000

Estimated residual value $400,000

Residual value guarantee $300,000 residual value guarantee is provided
by a third party unrelated to Lessee Corp or
Lessor Corp

Interest rate charged in the lease 5.0%

Other Title to the asset remains with Lessor Corp upon
lease expiration

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