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Leveraged leases
Examples of changes in other important assumptions that would likely change the total estimated net
income from a leveraged lease include:
□ A change in the estimated amount of federal or state income taxes to be paid over the term of the
lease
This includes changes resulting from a change in enacted income tax rates, as well as those that
result from a change in state apportionment factors.
□ A change in assumptions regarding the deductibility of certain transaction-related expenses
□ Decreases in estimated residual value judged to be other-than-temporary; an upward adjustment
of estimated residual value is not allowed
□ Other changes in the amount or timing of lease-related cash flows, for example, changes in the
amount or timing of rent collections
As required by ASC 842-50-35-6, the rate of return and the allocation of income to positive investment
years should be recalculated from the inception of the lease. The change in the net investment as of the
date the arrangement is modified should be recognized as a gain or loss in the current period. The
collectability of restructured lease payments and realization of the residual value should also be
assessed. However, as discussed in ASC 842-50-35-8, the lessor should not record an upward
adjustment to the leased property’s residual value even if the amount of the lessee’s residual value
guarantee is increased; this would be similar to recognizing a gain contingency, which is prohibited.
See ARM 4650.54 for additional information.
7.4 Leveraged leases acquired in a business combination
A leveraged lease acquired in a business combination should retain its original lease classification
provided it is not modified and it was eligible for grandfathering under ASC 842. The net investment
in the leveraged lease is recorded at its fair value on the acquisition date, which normally
approximates the present value of expected cash flows. Upon acquisition, the acquirer should measure
the net investment in the leveraged lease at its fair value and separately recognize its component parts
(i.e., the net rentals receivables, estimated residual value, and unearned income) on a gross basis. See
ASC 842-50-55-27 through 55-33 for an illustration. See ARM 4650.55, BCG 4.3.3.7, and TX 2.4.2 for
additional information on the accounting for leveraged leases acquired in a business combination.
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