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8.4.3.1 Purchase of an unguaranteed residual asset

ASC 842-30-40-4 refers to ASC 360 for guidance on a third-party’s acquisition of an interest in the
unguaranteed residual value of an asset from the lessor. As discussed in ASC 360-10-25-4, the third
party should record the interest as an asset on the date it is acquired; the interest should be initially
measured using the guidance in ASC 360-10-30-3 and 30-4.

ASC 360-10-30-3

An interest in the residual value of a leased asset recognized under paragraph 360-10-25-4 shall be
measured initially at the amount of cash disbursed, the fair value of other consideration given, and the
present value of liabilities assumed.

ASC 360-10-30-4
The fair value of the interest in the residual value of the leased asset at the date of the agreement shall
be used to measure its cost if that fair value is more clearly evident than the fair value of assets
surrendered, services rendered, or liabilities assumed.

ASC 360-10-35-14 provides guidance on the subsequent accounting for an interest in the
unguaranteed residual value of a leased asset. It should be carried at its acquisition cost until it is sold
(or otherwise disposed of). If there is an other-than-temporary decline in the value, it should be
written down to fair value with a loss recognized equal to the amount of the write-down.

ASC 360-10-35-14
An entity acquiring an interest in the residual value of any leased asset, irrespective of the
classification of the related lease by the lessor, shall not recognize increases to the asset’s estimated
value over the remaining term of the related lease, and the asset shall be reported at no more than its
acquisition cost until sale or disposition. If it is subsequently determined that the fair value of the
residual value of a leased asset has declined below the carrying amount of the acquired interest and
that decline is other than temporary, the asset shall be written down to fair value, and the amount of
the write-down shall be recognized as a loss. That fair value becomes the asset’s new carrying amount,
and the asset shall not be increased for any subsequent increase in its fair value before its sale or
disposition.

8.4.3.2 Purchase of guaranteed residual asset

If the future residual value of a leased asset is guaranteed at lease commencement by either the lessee
or another party, it is considered a financial asset under ASC 860. Therefore, such guaranteed residual
value would be accreted to the guaranteed amount by the purchaser if the transfer of the guaranteed
residual value qualifies as a sale under the derecognition requirements of ASC 860 (refer to TS 3). If it
does not, a purchaser should follow the secured borrowing guidance in ASC 860 (refer to TS 5). If the
residual is guaranteed after the lease commencement date, it is considered the same as an
unguaranteed residual asset by the purchaser and accounted for as discussed in LG 8.4.3.1.

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