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Appendix C: Key terms

Term Definition

Leasehold improvements An improvement made by a lessee to leased property.
The leasehold improvement is owned by a lessee

Lessee An entity that enters into a contract to obtain the
right to use an underlying asset for a period of time in
exchange for consideration

Lessor An entity that enters into a contract to provide the
right to use an underlying asset for a period of time in
exchange for consideration

Leveraged lease Leveraged lease classification applies only to lessors.
Leveraged leases have the following characteristics:
The terms of the lease meet the criteria to be
classified as a direct financing lease, as defined in
ASC 840
The lease involves at least three parties: a lessee, a
long-term creditor, and a lessor
The financing provided by the long-term creditor is
nonrecourse to the general credit of the lessor and
must provide the lessor (the equity investor)
substantial leverage in the transaction
The lessor’s net investment in the leveraged lease
declines and subsequently rises during the lease term

Net investment in the lease For a sales-type lease, the sum of the lease receivable
and the unguaranteed residual asset

For a direct financing lease, the sum of the lease
receivable and the unguaranteed residual asset, net of
any deferred selling profit

Nonrecourse debt Associated with a leveraged lease; debt for which the
only source of repayment is from unremitted rents, a
residual value guarantee from the lessee, variable
rents, or liquidation of the underlying asset

Not-for-profit entity An entity that possesses the following characteristics
in varying degrees, that distinguish it from a business
entity: (a) contributions of significant amounts of
resources from resource providers who do not expect
commensurate or proportionate pecuniary return, (b)
operating purposes other than to provide goods or
services at a profit, and (c) the absence of ownership
interests like those of business entities

Operating lease A lease in which a lessor transfers the use of an asset
to a lessee for a period of time but does not effectively
transfer control of the underlying asset

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