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ASC 842-30-55-6

If the transaction qualifies as an operating lease, the net proceeds upon the equipment’s initial transfer
should be recorded as a liability in the manufacturer’s balance sheet.

ASC 842-30-55-7

The liability is then subsequently reduced on a pro rata basis over the period to the first exercise date
of the guarantee to the amount of the guaranteed residual value at that date with corresponding
credits to revenue in the manufacturer’s income statement. Any further reduction in the guaranteed
residual value resulting from the purchaser’s decision to continue to use the equipment should be
recognized in a similar manner.

ASC 842-30-55-8

The equipment should be included in the manufacturer’s balance sheet and depreciated following the
manufacturer’s normal depreciation policy.

ASC 842-30-55-9

The Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 on property, plant,
and equipment provide guidance on the accounting for any potential impairment of the equipment.

If the customer elects to sell the equipment to a third party, the recorded liability should be reduced by
the amount, if any, paid by the manufacturer to the customer. With the sale of the asset, the
manufacturer has no remaining obligation to the customer. Therefore, the manufacturer should
remove any remaining liability, derecognize the equipment from its balance sheet, and recognize any
resulting gain or loss in net income in the period of the sale.

If the customer chooses to sell the equipment back to the manufacturer, the recorded liability should
derecognized. If there is a difference between the recorded liability and the amount paid to the
customer, the difference should be recognized as a gain or loss in the period of the sale. The
manufacturer should not adjust the carrying value of the asset.

8.5.2 Evaluating a guaranteed minimum resale agreement to determine whether it contains
an embedded derivative

Although leases are not in the scope of the guidance in ASC 815, Derivatives and Hedging, a lease may
contain an embedded derivative that should be separated. For example, a residual value guarantee
grants the holder a put right, which may be an embedded derivative.

An embedded derivative should be separated from its host contract if (1) it is not clearly and closely
related to its host instrument and (2) it would be considered a derivative within the scope of ASC 815,
if it were a separate instrument. Some residual value guarantees may meet the definition of a
derivative; however, they would likely meet the scope exception for residual value guarantees in ASC
815-10-15-80.

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