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Leveraged leases
accordance with the guidance in ASC 842-10 and 842-30. See LG 3 for information on lease
classification.
A leveraged lease arrangement may be changed in one or more ways during the lease term, including
through the following events or actions:
□ Lessor actions that change the fundamental characteristics of a leveraged lease transaction, for
example, refinancing the nonrecourse debt
□ An agreement by the lessor and lessee to modify or restructure the provisions of the lease
□ Changes in the assumptions regarding the total amount or projected timing of related cash flows
Depending on the type of change in the leveraged lease, the lessor may be required to:
□ Reassess the lease classification in accordance with ASC 840-10-35-4 and discontinue accounting
for the lease as a leveraged lease if the characteristics required for leveraged lease accounting are
no longer present
□ Discontinue the use of leveraged lease accounting and account for the modified arrangement as a
new lease under ASC 842
□ Recalculate the net investment in the leveraged lease and record a gain or loss in the period of the
change, without reassessing the classification of the lease
7.3.1 Changes to the fundamental characteristics of a leveraged lease
As noted in LG 7.2.1, an arrangement must have certain characteristics to qualify for leveraged lease
accounting. A lessor may change aspects of the fundamental structure of an existing lease without
necessarily changing the provisions of the agreement with the lessee. If, as a result of such changes,
one or more of the defining characteristics of a leveraged lease are no longer present, the lessor may be
required to discontinue leveraged lease accounting and reclassify the lease. If a lessor is required to
discontinue leveraged lease accounting, it should classify the lease on the date it is changed as either
an operating, sales-type, or direct financing lease based on the guidance in ASC 842.
Examples of changes that could cause a lessor to discontinue leverage lease accounting include:
□ A lessor repays all of the nonrecourse debt, such that the transaction no longer has a long-term
creditor
□ A lessor repays a portion of the nonrecourse debt, such that the amount of nonrecourse debt no
longer represents “substantial leverage” in the transaction
□ A lessor replaces the nonrecourse debt with recourse debt
7.3.1.1 Requirement for a long-term creditor
In addition to other criteria, a leveraged lease transaction must have a long-term creditor that provides
the lessor with substantial leverage in the transaction, as discussed in ASC 840-10-25-43(c). That
guidance does not define the required duration that the long-term creditor must remain in the
7-4
