# ASC 842-30-55: Leases — Lessor — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

[Read online](https://asc.understandingaccounting.org/asc/842/30/#55-implementation-guidance-and-illustrations)

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## ASC 842-30-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/842/30/#55-implementation-guidance-and-illustrations)

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#### Implementation Guidance

##### [842-30-55-1](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-1)

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This implementation guidance addresses the application of the provisions of this Subtopic in the following circumstances. A manufacturer sells equipment with an expected [useful life](https://asc.understandingaccounting.org/glossary/u/#useful-life "The period over which an asset is expected to contribute directly or indirectly to future cash flows.") of several years to end users (purchasers) utilizing various sales incentive programs. Under one such sales incentive program, the manufacturer contractually guarantees that the purchaser will receive a minimum resale amount at the time the equipment is disposed of, contingent on certain requirements.

##### [842-30-55-2](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-2)

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The manufacturer provides the guarantee by agreeing to do either of the following:

1.  a
    
    Reacquire the equipment at a guaranteed price at specified time periods as a means to facilitate its resale
    
2.  b
    
    Pay the purchaser for the deficiency, if any, between the sales proceeds received for the equipment and the guaranteed minimum resale value.
    

There may be dealer involvement in these types of transactions, but the minimum resale guarantee is the responsibility of the manufacturer.

##### [842-30-55-3](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-3)

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A sales incentive program in which an entity (for example, a manufacturer) contractually guarantees that it has either a right or an obligation to reacquire the equipment at a guaranteed price (or prices) at a specified time (or specified time periods) as a means to facilitate its resale should be evaluated in accordance with the guidance on satisfaction of performance obligations in paragraph [606-10-25-30](https://asc.understandingaccounting.org/asc/606/10/#606-10-25-30) and the guidance on repurchase agreements in paragraphs

[606-10-55-66 through 55-78](https://asc.understandingaccounting.org/asc/606/10/#606-10-55-66)

. If that evaluation results in a [lease](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration."), the manufacturer should account for the transaction as a lease using the principles of lease accounting in Subtopic 842-10 and in this Subtopic.

##### [842-30-55-4](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-4)

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A sales incentive program in which an entity (for example, a manufacturer) contractually guarantees that it will pay a purchaser for the deficiency, if any, between the sales proceeds received for the equipment and the guaranteed minimum resale value should be accounted for in accordance with Topic 460 on guarantees and Topic 606 on revenue from [contracts](https://asc.understandingaccounting.org/glossary/c/#contract "An agreement between two or more parties that creates enforceable rights and obligations.") with customers.

##### [842-30-55-5](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-5)

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The [lease payments](https://asc.understandingaccounting.org/glossary/l/#lease-payments "See paragraph 842-10-30-5 for what constitutes lease payments from the perspective of a lessee and a lessor.") used as part of the determination of whether the transaction should be classified as an [operating lease](https://asc.understandingaccounting.org/glossary/o/#operating-lease "From the perspective of a lessee, any lease other than a finance lease. From the perspective of a lessor, any lease other than a sales-type lease or a direct financing lease."), a [direct financing lease](https://asc.understandingaccounting.org/glossary/d/#direct-financing-lease "From the perspective of a lessor, a lease that meets none of the criteria in paragraph 842-10-25-2 but meets the criteria in paragraph 842-10-25-3(b)and is not an operating lease in accordance with paragraph 842-10-25-3A."), or a [sales-type lease](https://asc.understandingaccounting.org/glossary/s/#sales-type-lease "From the perspective of a lessor, a lease that meets one or more of the criteria in paragraph 842-10-25-2 and is not an operating lease in accordance with paragraph 842-10-25-3A.") generally will be the difference between the proceeds upon the equipment's initial transfer and the amount of the [residual value guarantee](https://asc.understandingaccounting.org/glossary/r/#residual-value-guarantee "A guarantee made to a lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount.") to the purchaser as of the first exercise date of the guarantee.

##### [842-30-55-6](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-6)

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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.

##### [842-30-55-7](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-7)

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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.

##### [842-30-55-8](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-8)

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

##### [842-30-55-9](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-9)

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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.

##### [842-30-55-10](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-10)

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At the time the purchaser elects to exercise the residual value guarantee by selling the equipment to another party, the liability should be reduced by the amount, if any, paid to the purchaser. The remaining undepreciated carrying amount of the equipment and any remaining liability should be removed from the balance sheet and included in the determination of income of the period of the equipment's sale.

##### [842-30-55-11](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-11)

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Alternatively, if the purchaser exercises the residual value guarantee by selling the equipment to the manufacturer at the guaranteed price, the liability should be reduced by the amount paid to the purchaser. Any remaining liability should be included in the determination of income of the period of the exercise of the guarantee.

##### [842-30-55-12](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-12)

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The accounting for a guaranteed minimum resale value is not in the scope of Topic 815 on derivatives and hedging. In the transaction described, the embedded guarantee feature is not an embedded derivative instrument that must be accounted for separately from the lease because it does not meet the criterion in paragraph [815-15-25-1(c)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1).

##### [842-30-55-13](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-13)

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Specifically, if freestanding, the guarantee feature would be excluded from the scope of paragraph [815-10-15-59(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) because of both of the following conditions:

1.  a
    
    It is not exchange traded.
    
2.  b
    
    The underlying on which settlement is based is the price of a nonfinancial asset of one of the parties, and that asset is not readily convertible to cash. It is assumed that the equipment is not readily convertible to cash, as that phrase is used in Topic 815.

##### [842-30-55-14](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-14)

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Paragraph [815-10-15-59(b)(2)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) states that the related exception applies only if the nonfinancial asset related to the underlying is owned by the party that would not benefit under the contract from an increase in the price or value of the nonfinancial asset. (In some circumstances, the exclusion in paragraph [815-10-15-63](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-63) also would apply.)

##### [842-30-55-15](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-15)

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Lastly, Topic 460 on guarantees does not affect the guarantor's accounting for the guarantee because that Topic does not apply to a guarantee for which the underlying is related to an asset of the guarantor. Because the manufacturer continues to recognize the residual value of the equipment guaranteed by the manufacturer as an asset (included in the seller-lessor's [net investment in the lease](https://asc.understandingaccounting.org/glossary/n/#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.")) if recording a sales-type lease, that guarantee does not meet the characteristics in paragraph [460-10-15-4](https://asc.understandingaccounting.org/asc/460/10/#460-10-15-4) and is, therefore, not subject to the guidance in Topic 460. Additionally, if the lease is classified as an operating lease, the manufacturer does not remove the asset from its books, and its guarantee would be a market value guarantee of its own asset. A market value guarantee of the guarantor's own asset is not within the scope of Topic 460, and the guidance in paragraphs

[842-10-55-32 through 55-33](https://asc.understandingaccounting.org/asc/842/10/#842-10-55-32)

for an operating lease is not affected. As a result, the guarantor's accounting for the guarantee is unaffected by Topic 460.

##### [842-30-55-16](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-16)

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Indemnification payments related to tax effects other than the investment tax credit should be reflected by the [lessor](https://asc.understandingaccounting.org/glossary/l/#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.") in income consistent with the classification of the [lease](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration."). That is, the payments should be accounted for as an adjustment of the lessor's [net investment in the lease](https://asc.understandingaccounting.org/glossary/n/#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.") if the lease is a [sales-type lease](https://asc.understandingaccounting.org/glossary/s/#sales-type-lease "From the perspective of a lessor, a lease that meets one or more of the criteria in paragraph 842-10-25-2 and is not an operating lease in accordance with paragraph 842-10-25-3A.") or a [direct financing lease](https://asc.understandingaccounting.org/glossary/d/#direct-financing-lease "From the perspective of a lessor, a lease that meets none of the criteria in paragraph 842-10-25-2 but meets the criteria in paragraph 842-10-25-3(b)and is not an operating lease in accordance with paragraph 842-10-25-3A.") or recognized ratably over the [lease term](https://asc.understandingaccounting.org/glossary/l/#lease-term "The noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following: Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.") if the lease is an [operating lease](https://asc.understandingaccounting.org/glossary/o/#operating-lease "From the perspective of a lessee, any lease other than a finance lease. From the perspective of a lessor, any lease other than a sales-type lease or a direct financing lease.").

##### [842-30-55-17](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-17)

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This Subtopic considers the right to control the use of the [underlying asset](https://asc.understandingaccounting.org/glossary/u/#underlying-asset "An asset that is the subject of a lease for which a right to use that asset has been conveyed to a lessee. The underlying asset could be a physically distinct portion of a single asset.") as the equivalent of physical use. If the [lessee](https://asc.understandingaccounting.org/glossary/l/#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.") controls the use of the underlying asset, recognition of [lease](https://asc.understandingaccounting.org/glossary/l/#lease "A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.") income in accordance with paragraph [842-30-25-11(a)](https://asc.understandingaccounting.org/asc/842/30/#842-30-25-11) should not be affected by the extent to which the lessee uses the underlying asset.

##### [842-30-55-17A](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-17A)

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Notwithstanding the definition of [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."), if a lessor is not a manufacturer or a dealer, the fair value of the [underlying asset](https://asc.understandingaccounting.org/glossary/u/#underlying-asset "An asset that is the subject of a lease for which a right to use that asset has been conveyed to a lessee. The underlying asset could be a physically distinct portion of a single asset.") at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between the acquisition of the underlying asset and lease commencement, the definition of fair value shall be applied.

#### Illustrations

##### [842-30-55-18](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-18)

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Example 1 illustrates how a lessor would account for sales-type leases and direct financing leases.

##### [842-30-55-19](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-19)

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Lessor enters into a 6-year lease of equipment with Lessee, receiving annual lease payments of $9,500, payable at the end of each year. Lessee provides a residual value guarantee of $13,000. Lessor concludes that it is probable it will collect the lease payments and any amount necessary to satisfy the residual value guarantee provided by Lessee. The equipment has a 9-year estimated remaining economic life, a carrying amount of $54,000, and a fair value of $62,000 at the commencement date. Lessor expects the residual value of the equipment to be $20,000 at the end of the 6-year lease term. The lease does not transfer ownership of the underlying asset to Lessee or contain an option for Lessee to purchase the underlying asset. Lessor incurs $2,000 in initial direct costs in connection with obtaining the lease, and no amounts are prepaid by Lessee to Lessor. The rate implicit in the lease is 5.4839 percent.

##### [842-30-55-20](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-20)

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Lessor classifies the lease as a sales-type lease because the sum of the present value of the lease payments and the present value of the residual value guaranteed by the lessee amounts to substantially all of the fair value of the equipment. None of the other criteria to be classified as a sales-type lease are met. In accordance with paragraph [842-10-25-4](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-4), the discount rate used to determine the present value of the lease payments and the present value of the residual value guaranteed by Lessee (5.4839 percent) for purposes of assessing whether the lease is a sales-type lease under the criterion in paragraph [842-10-25-2(d)](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-2) assumes that no initial direct costs will be capitalized because the fair value of the equipment is different from its carrying amount.

##### [842-30-55-21](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-21)

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Effective as of: not established by retrieval timestamps.


Lessor measures the net investment in the lease at $62,000 at lease commencement, which is equal to the fair value of the equipment. The net investment in the lease consists of the lease receivable (which includes the 6 annual payments of $9,500 and the residual value guarantee of $13,000, both discounted at the rate implicit in the lease, which equals $56,920) and the present value of the unguaranteed residual value (the present value of the difference between the expected residual value of $20,000 and the residual value guarantee of $13,000, which equals $5,080). Lessor calculates the selling profit on the lease as $8,000, which is the difference between the lease receivable ($56,920) and the carrying amount of the equipment net of the unguaranteed residual asset ($54,000 - $5,080 = $48,920). The initial direct costs do not factor into the calculation of the selling profit in this Example because they are not eligible for deferral on the basis of the guidance in paragraph [842-30-25-1(c)](https://asc.understandingaccounting.org/asc/842/30/#842-30-25-1) (that is, because the fair value of the underlying asset is different from its carrying amount at the commencement date).

##### [842-30-55-22](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-22)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:85f03601f74d1a9682dc6f36c9a9ddede1ed5822368969fdb8a4b4df2c4f4a71

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the commencement date, Lessor derecognizes the equipment (carrying amount of $54,000) and recognizes the net investment in the lease of $62,000 and the selling profit of $8,000. Lessor also pays and recognizes the initial direct costs of $2,000 as an expense.

##### [842-30-55-23](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-23)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:a333b7b84a3593a9fa2e2a47b176637d6c5f4c497b884210c845b94e05202322

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 1, Lessor recognizes the receipt of a lease payment of $9,500 and interest on the net investment in the lease (the beginning balance of the net investment in the lease of $62,000 × the rate implicit in the lease of 5.4839% = $3,400), resulting in a balance in the net investment of the lease of $55,900. For disclosure purposes, Lessor also calculates the separate components of the net investment in the lease: the lease receivable and the unguaranteed residual asset. The lease receivable equals $50,541 (the beginning balance of the lease receivable of $56,920 - the annual lease payment received of $9,500 + the amount of interest income on the lease receivable during Year 1 of $3,121, which is $56,920 × 5.4839%). The unguaranteed residual asset equals $5,360 (the beginning balance of the unguaranteed residual asset of $5,081 + the interest income on the unguaranteed residual asset during Year 1 of $279, which is $5,081 × 5.4839%).

##### [842-30-55-24](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-24)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:ef80cd40c44b7e9b04145bbdd81efec7b886a300300427869df67c4865a42fe2

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 6, Lessor reclassifies the net investment in the lease, then equal to the estimated residual value of the underlying asset of $20,000, as equipment.

##### [842-30-55-25](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-25)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:df09c5d4d8cb2e9e82debebd07c4006b585350aac13c10394cacd8da10ecc3ff

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Assume the same facts and circumstances as in Case A (paragraphs

[842-30-55-19 through 55-24](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-19)

), except that it is not probable Lessor will collect the lease payments and any amount necessary to satisfy the residual value guarantee provided by Lessee. In reaching this conclusion, the entity observes that Lessee's ability and intention to pay may be in doubt because of the following factors:

1.  a
    
    Lessee intends to make the lease payments primarily from income derived from its business in which the equipment will be used (which is a business facing significant risks because of high competition in the industry and Lessee's limited experience)
    
2.  b
    
    Lessee has limited credit history and no significant other income or assets with which to make the payments if the business is not successful.

##### [842-30-55-26](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-26)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:58a0bc8fdf1385d111bee6d48bbeffcd312a9d875144009891f18cea32a6c747

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


In accordance with paragraph [842-30-25-3](https://asc.understandingaccounting.org/asc/842/30/#842-30-25-3), Lessor does not derecognize the equipment and does not recognize a net investment in the lease or any selling profit or selling loss. However, consistent with Case A, Lessor pays and recognizes the initial direct costs of $2,000 as an expense at the commencement date.

##### [842-30-55-27](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-27)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:d3bceffc7aa87d8fb622626e8c340def54eae1ace75898371885d9623c20d3f5

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 1, Lessor reassesses whether it is probable it will collect the lease payments and any amount necessary to satisfy the residual value guarantee provided by Lessee and concludes that it is not probable. In addition, neither of the events in paragraph [842-30-25-3(b)](https://asc.understandingaccounting.org/asc/842/30/#842-30-25-3) has occurred. The contract has not been terminated and Lessor has not repossessed the equipment because Lessee is fulfilling the terms of the contract. Consequently, Lessor accounts for the $9,500 Year 1 lease payment as a deposit liability in accordance with paragraph [842-30-25-3](https://asc.understandingaccounting.org/asc/842/30/#842-30-25-3). Lessor recognizes depreciation expense on the equipment of $7,714 ($54,000 carrying value ÷ 7-year useful life).

##### [842-30-55-28](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-28)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:3211cdaa35a6605c0f05f28c9201a05f06b147383eac88a867ef6a3e7df54986

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Lessor's accounting in Years 2 and 3 is the same as in Year 1. At the end of Year 4, Lessee makes the fourth $9,500 annual lease payment such that the deposit liability equals $38,000. Lessor concludes that collectibility of the lease payments and any amount necessary to satisfy the residual value guarantee provided by Lessee is now probable on the basis of Lessee's payment history under the contract and the fact that Lessee has been successfully operating its business for four years. Lessor does not reassess the classification of the lease as a sales-type lease.

##### [842-30-55-29](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-29)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:a48659a9b101f41c60a0f3fec35e49183ddd71dfd50f6022ed72a3a4d62b933a

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Consequently, at the end of Year 4, Lessor derecognizes the equipment, which has a carrying amount of $23,143, and recognizes a net investment in the lease of $35,519. The net investment in the lease consists of the lease receivable (the sum of the 2 remaining annual payments of $9,500 and the residual value guarantee of $13,000, discounted at the rate implicit in the lease of 5.4839 percent determined at the commencement date, which equals $29,228) and the unguaranteed residual asset (the present value of the difference between the expected residual value of $20,000 and the residual value guarantee of $13,000, which equals $6,291). Lessor recognizes selling profit of $50,376, the difference between (a) the sum of the lease receivable and the carrying amount of the deposit liability ($29,228 lease receivable + $38,000 in lease payments already made = $67,228) and (b) the carrying amount of the equipment, net of the unguaranteed residual asset ($23,143 - $6,291 = $16,852).

##### [842-30-55-30](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-30)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:f8a96e34e85323d11077a409f2631d1d4ef8fa53e631baaa2725db0393aadb65

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


After the end of Year 4, Lessor accounts for the remaining two years of the lease in the same manner as any other sales-type lease. Consistent with Case A, at the end of Year 6, Lessor reclassifies the net investment in the lease, then equal to the estimated residual value of the underlying asset of $20,000, as equipment.

##### [842-30-55-31](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-31)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:8f523b81b5a3b5fda5e4a32cfaa75d9d324c42b3a0dcba5ddced117ef418b4ab

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Assume the same facts and circumstances as in Case A (paragraphs

[842-30-55-19 through 55-24](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-19)

), except that the $13,000 residual value guarantee is provided by a third party, not by Lessee. Collectibility of the lease payments and any amount necessary to satisfy the third-party residual value guarantee is probable.

##### [842-30-55-32](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-32)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:bd1f185f370279abc7e1f1b94f97f822e6c44a143cc1a4d4ddff3cc5659017ca

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


None of the criteria in paragraph [842-10-25-2](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-2) to be classified as a sales-type lease are met. In accordance with paragraph [842-10-25-4](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-4), the discount rate used to determine the present value of the lease payments (5.4839 percent) for purposes of assessing whether the lease is a sales-type lease under the criterion in paragraph [842-10-25-2(d)](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-2) assumes that no initial direct costs will be capitalized because the fair value of the equipment is different from its carrying amount.

##### [842-30-55-32A](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-32A)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:f3c71c2fb627c3e9aee4e6d0b10fd9cf3e47857489cef0facd9a57ba5b99b2f1

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Rather, Lessor classifies the lease as a direct financing lease because the sum of the present value of the lease payments and the present value of the residual value guaranteed by the third party amounts to substantially all of the fair value of the equipment, and it is probable that Lessor will collect the lease payments plus any amount necessary to satisfy the third-party residual value guarantee. The discount rate used to determine the present value of the lease payments and the present value of the third-party residual value guarantee for purposes of assessing whether the lease meets the criterion in paragraph [842-10-25-3(b)(1)](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-3) to be classified as a direct financing lease is the rate implicit in the lease of 4.646 percent, which includes the initial direct costs of $2,000 that Lessor incurred.

##### [842-30-55-33](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-33)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:ee537a4b5b08078919d2906a51ece7a8d40d5209a98c862cd88dba5a72ed2b96

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the commencement date, Lessor derecognizes the equipment and recognizes a net investment in the lease of $56,000, which is equal to the carrying amount of the underlying asset of $54,000 plus the initial direct costs of $2,000 that are included in the measurement of the net investment in the lease in accordance with paragraph [842-30-25-8](https://asc.understandingaccounting.org/asc/842/30/#842-30-25-8) (that is, because the lease is classified as a direct financing lease). The net investment in the lease includes a lease receivable of $58,669 (the present value of the 6 annual lease payments of $9,500 and the third-party residual value guarantee of $13,000, discounted at the rate implicit in the lease of 4.646 percent), an unguaranteed residual asset of $5,331 (the present value of the difference between the estimated residual value of $20,000 and the third-party residual value guarantee of $13,000, discounted at 4.646 percent), and deferred selling profit of $8,000.

##### [842-30-55-34](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-34)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:c76f03dd0b3ff24d27f945874ebb04e0857ca87f5e970df89a0a0ad160e07e81

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Lessor calculates the deferred selling profit of $8,000 in this Example as follows:

1.  a
    
    The lease receivable ($58,669); minus
    
2.  b
    
    The carrying amount of the equipment ($54,000), net of the unguaranteed residual asset ($5,331), which equals $48,669; minus
    
3.  c
    
    The initial direct costs included in the measurement of the net investment in the lease ($2,000).

##### [842-30-55-35](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-35)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:2d1e2264bf3c4e8f234132c4491422f294a1abb045f0bd541581f2b28b8f7d79

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 1, Lessor recognizes the receipt of the lease payment of $9,500 and interest on the net investment in the lease of $4,624 (the beginning balance of the net investment in the lease of $56,000 × the discount rate that, at the commencement date, would have resulted in the sum of the lease receivable and the unguaranteed residual asset equaling $56,000, which is 8.258 percent), resulting in a balance in the net investment of the lease of $51,124.

##### [842-30-55-36](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-36)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:f515bafa5a3d70c8221ea6a292c2308c0a8721bc9db9be7dc464bbf0f308eddc

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Also at the end of Year 1, Lessor calculates, for disclosure purposes, the separate components of the net investment in the lease: the lease receivable, the unguaranteed residual asset, and the deferred selling profit. The lease receivable equals $51,895 (the beginning balance of the lease receivable of $58,669 - the annual lease payment received of $9,500 + the amount of interest income on the lease receivable during Year 1 of $2,726, which is $58,669 × 4.646%). The unguaranteed residual asset equals $5,578 (the beginning balance of the unguaranteed residual asset of $5,331 + the interest income on the unguaranteed residual asset during Year 1 of $247, which is $5,331 × 4.646%). The deferred selling profit equals $6,349 (the initial deferred selling profit of $8,000 - $1,651 recognized during Year 1 \[the $1,651 is the difference between the interest income recognized on the net investment in the lease during Year 1 of $4,624 calculated in paragraph [842-30-55-35](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-35) and the sum of the interest income earned on the lease receivable and the unguaranteed residual asset during Year 1\]).

##### [842-30-55-37](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-37)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:116c0d0f62a94afb73ec5795d23e6b9feac092d49a9eaaaaa282287109bd67c8

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 2, Lessor recognizes the receipt of the lease payment of $9,500 and interest on the net investment in the lease (the beginning of Year 2 balance of the net investment in the lease of $51,124 × 8.258%, which is $4,222), resulting in a carrying amount of the net investment in the lease of $45,846.

##### [842-30-55-38](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-38)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:91ca71a2bac7f7371381f0a98e488b390f2532e94be5cd39528e29cc81403a1c

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Also at the end of Year 2, Lessor calculates the separate components of the net investment in the lease. The lease receivable equals $44,806 (the beginning of Year 2 balance of $51,895 - the annual lease payment received of $9,500 + the interest income earned on the lease receivable during Year 2 of $2,411, which is $51,895 × 4.646%). The unguaranteed residual asset equals $5,837 (the beginning of Year 2 balance of the unguaranteed residual asset of $5,578 + the interest income earned on the unguaranteed residual asset during Year 2 of $259, which is $5,578 × 4.646%). The deferred selling profit equals $4,797 (the beginning of Year 2 balance of deferred selling profit of $6,349 - $1,552 recognized during Year 2 \[the $1,552 is the difference between the interest income recognized on the net investment in the lease during Year 2 of $4,222 and the sum of the interest income earned on the lease receivable and the unguaranteed residual asset during Year 2\]).

##### [842-30-55-39](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-39)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:d0a0832e17b0fb7c71c095b2842616990e6ad6a18deed877edbfb2cc0ad71c65

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 6, Lessor reclassifies the net investment in the lease, then equal to the estimated residual value of the underlying asset of $20,000, as equipment.

##### [842-30-55-40](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-40)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:159c9f9cb5b5aeae3a69e95aca348c9f6d5ec66b4d5e10e684a23c3cbf329f2a

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Assume the same facts and circumstances as Case C (paragraphs

[842-30-55-31 through 55-39](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-31)

), except that collectibility of the lease payments and any amount necessary to satisfy the residual value guarantee provided by the third party is not probable and the lease payments escalate every year over the lease term. Specifically, the lease payment due at the end of Year 1 is $7,000, and subsequent payments increase by $1,000 every year for the remainder of the lease term. Because it is not probable that Lessor will collect the lease payments and any amount necessary to satisfy the residual value guarantee provided by the third party in accordance with paragraph [842-10-25-3](https://asc.understandingaccounting.org/asc/842/10/#842-10-25-3), Lessor classifies the lease as an operating lease.

##### [842-30-55-41](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-41)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:3878fa6f26e9f364a75e01b81c0f08a313891d5d705dd96532abf29cb9f63277

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Lessor continues to measure the equipment in accordance with Topic 360 on property, plant, and equipment.

##### [842-30-55-42](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-42)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:41e3640d1ea4da9e253da986c49a6eb5c642b8a6fc792564641a6526d161c61f

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


Because collectibility of the lease payments is not probable, Lessor recognizes lease income only when Lessee makes the lease payments, and in the amount of those lease payments. Therefore, Lessor only recognizes lease income of $7,000 at the point in time Lessee makes the end of Year 1 payment for that amount.

##### [842-30-55-43](https://asc.understandingaccounting.org/asc/842/30/#842-30-55-43)

Pending content: no

Source downloaded (UTC): 2026-09-10T01:57:30.582Z to 2026-09-10T01:57:30.582Z

Record version: sha256:d287a5288690734cb3c3dd98c839f432683767cb0ccb8069297eef52e8f788cc

Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

Effective as of: not established by retrieval timestamps.


At the end of Year 2, Lessor concludes that collectibility of the remaining lease payments and any amount necessary to satisfy the residual value guarantee provided by the third party is probable; therefore, Lessor recognizes lease income of $12,000. The amount of $12,000 is the difference between lease income that would have been recognized through the end of Year 2 ($57,000 in total lease payments ÷ 6 years = $9,500 per year × 2 years = $19,000) and the $7,000 in lease income previously recognized. Collectibility of the remaining lease payments remains probable throughout the remainder of the lease term; therefore, Lessor continues to recognize lease income of $9,500 each year.