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8.4 Sale of lease receivables and residual assets

The sale of a lease receivable (the right to receive lease payments and guaranteed residual values at
lease commencement) should be accounted for under the provisions of ASC 860, Transfers and
Servicing. ASC 860 does not address, however, a sale of the unguaranteed residual asset in sales-type
and direct financing leases. We believe such sales, including the sale of residual values guaranteed
after commencement, should be accounted for under ASC 842, which refers to the sale guidance in
ASC 606 (see LG 8.4.2 for more details).

8.4.1 Accounting for the sale of a lease receivable

To account for the sale of a lease receivable, a lessor should evaluate the derecognition requirements of
ASC 860 to determine whether a transfer of a lease receivable qualifies as a sale (refer to TS 3). If it
does not, a lessor should follow the secured borrowing guidance in ASC 860 (refer to TS 5). If it does,
ASC 842-30-35-4 provides guidance on a lessor’s accounting for the retained unguaranteed residual
asset.

ASC 842-30-35-4
If a lessor sells substantially all of the lease receivable associated with a sales-type or a direct financing
lease and retains an interest in the unguaranteed residual asset, the lessor shall not continue to accrete
the unguaranteed residual asset to its estimated value over the remaining lease term. The lessor shall
report any remaining unguaranteed residual asset thereafter at its carrying amount at the date of the
sale of the lease receivable and apply Topic 360 on property, plant, and equipment to determine
whether the unguaranteed residual asset is impaired.

8.4.2 Accounting for the sale of an unguaranteed residual asset or a residual asset
guaranteed after commencement in a direct financing or a sales-type lease

There is no specific guidance in ASC 842 on what model to apply to the sale of a residual asset that is
either unguaranteed or guaranteed after the lease commencement date. Since an unguaranteed
residual is not a financial asset, ASC 860 does not apply. We believe the guidance in ASC 842-40-25-1
addressing the sale of nonfinancial assets should be applied to this type of transaction. Under that
guidance, sale recognition is permitted provided the requirements in ASC 606 for a sale are met. In
other words, to determine when an unguaranteed residual asset subject to a lease or a residual asset
guaranteed after commencement should be derecognized, the lessor should apply the guidance in:

□ ASC 606-10-25-1 through 25-8 to determine the existence of a contract, and

□ ASC 606-10-25-30 to determine when the entity satisfies a performance obligation by transferring
control of an asset.

8.4.3 Accounting for the purchase of an interest in the residual value of a leased asset

Residual assets may be guaranteed or unguaranteed.

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