# ASC 842-50: Leases — Leveraged Lease Arrangements Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/842/50/) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:58:02.364Z to 2026-09-10T01:58:37.823Z Record version: sha256:af08ac5b826a5a7829e90a66c4ce49088ef6fe930af06a51c157dea07ea4e02e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50: Leases — Leveraged Lease Arrangements ### Machine-generated study aids ```json { "summary": "ASC 842-50 preserves the legacy leveraged lease accounting model, but only for leases that existed at the ASC 842 transition date and meet the criteria in 842-10-65-1(z) — no new leveraged leases may be created. A lessor records a single net investment consisting of rentals receivable (net of nonrecourse debt service), investment-tax-credit receivable, estimated residual value, and unearned/deferred income (842-50-25-1; 842-50-30-1), and recognizes income only in years when the net investment (less related deferred taxes) is positive, using the rate of return that distributes total net income to those years (842-50-35-2). Important assumptions, including residual value and the projected timing of income tax cash flows, must be reviewed at least annually, with any change triggering recalculation from lease inception and immediate gain or loss recognition (842-50-35-6 through 35-8).", "key_points": [ "The Subtopic applies only to leases meeting transition paragraph 842-10-65-1(z); exercise of a previously not-reasonably-assured extension option is treated as a lease modification under that paragraph (842-50-15-1).", "The lessor's net investment in a leveraged lease is the net of rentals receivable (net of the portion applicable to principal and interest on the nonrecourse debt), the investment-tax-credit receivable, the estimated residual value, and unearned and deferred income (842-50-25-1; 842-50-30-1).", "Periodic income is computed on the net investment less related deferred taxes, using a rate of return — distinct from the interest rate implicit in the lease — applied only in years in which the net investment is positive (842-50-35-2).", "Net income comprises pretax lease income (or loss), investment tax credit, and the tax effect of pretax lease income (or loss); any loss that the method would allocate to future years must be recognized immediately (842-50-35-3 through 35-5).", "Residual value and other important assumptions (including the projected timing of income tax cash flows) must be reviewed at least annually; a decline in residual value that is other than temporary, or a change in total estimated net income, requires recalculation from inception with a gain or loss recognized in the year of the change, and upward adjustments of estimated residual value are prohibited (842-50-35-6 through 35-9; 35-19).", "Recalculations reflect tax positions under 740-10-25-6, 740-10-30-7, and 740-10-40-2, exclude interest and penalties, and treat advance payments/deposits with a taxing authority as part of the projected settlement amount rather than actual cash flows (842-50-35-12 through 35-15).", "Presentation requires related deferred taxes to be shown separately from the net investment on the balance sheet, and pretax leveraged lease income, its tax effect, and investment tax credit recognized to be shown separately in the income statement or notes; components of the net investment are disclosed if leveraged leasing is a significant part of the lessor's business (842-50-45-1; 842-50-50-1)." ], "categories": [ "Leases", "Subsequent measurement", "Income taxes", "Presentation" ], "audience_level": "advanced", "student_note": "This is grandfathered legacy guidance: ASC 842 prohibits new leveraged leases, so 842-50 applies only to pre-transition arrangements that were not modified. The classic exam trap is the asymmetry in residual value — an other-than-temporary decline forces a recalculation from lease inception with immediate gain/loss, but upward revisions of estimated residual value are never permitted (842-50-35-8(c)).", "related_topics": [ "842-10", "842-30", "740-10", "805-60", "326-20", "805" ], "key_concepts": [ "leveraged lease", "net investment in leveraged lease", "nonrecourse debt", "unearned and deferred income", "investment tax credit", "residual value review and recalculation", "rate of return on positive net investment years", "deferred taxes on leveraged leases" ] } ``` Source downloaded (UTC): 2026-09-10T01:58:02.364Z to 2026-09-10T01:58:02.364Z Record version: sha256:32e8ff10f1521a8299d7c7e973e3b7a3ddea4c0bbcf360b43743f3a01fcb7451 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-00: 00 Status [Read section](https://asc.understandingaccounting.org/asc/842/50/#00-status) SEC content: no ##### [842-50-00-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-00-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:02.364Z to 2026-09-10T01:58:02.364Z Record version: sha256:824204f9086532dd319d4ef9962b943d09277ccb1e5308fca7a1ea00aae40350 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
AcquireeAddedAccounting Standards Update No. 2016-0202/25/2016
AcquirerAmendedAccounting Standards Update No. 2025-0305/12/2025
AcquirerAddedAccounting Standards Update No. 2016-0202/25/2016
Acquisition by a Not-for-Profit EntityAddedAccounting Standards Update No. 2016-0202/25/2016
BusinessAmendedAccounting Standards Update No. 2017-0101/05/2017
BusinessAddedAccounting Standards Update No. 2016-0202/25/2016
Business CombinationAddedAccounting Standards Update No. 2016-0202/25/2016
Commencement Date of the Lease (Commencement Date)AddedAccounting Standards Update No. 2016-0202/25/2016
ContractAddedAccounting Standards Update No. 2016-0202/25/2016
Corporate Joint VentureAddedAccounting Standards Update No. 2023-0508/23/2023
Delayed Equity InvestmentAddedAccounting Standards Update No. 2016-0202/25/2016
Estimated Residual ValueAddedAccounting Standards Update No. 2016-0202/25/2016
Fair Value (2nd def.)AddedAccounting Standards Update No. 2016-0202/25/2016
Joint VentureAddedAccounting Standards Update No. 2023-0508/23/2023
LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Lease InceptionAddedAccounting Standards Update No. 2016-0202/25/2016
Lease ModificationAddedAccounting Standards Update No. 2016-0202/25/2016
Lease PaymentsAddedAccounting Standards Update No. 2016-0202/25/2016
Lease TermAddedAccounting Standards Update No. 2016-0202/25/2016
Legal EntityAddedAccounting Standards Update No. 2016-0202/25/2016
LesseeAddedAccounting Standards Update No. 2016-0202/25/2016
LessorAddedAccounting Standards Update No. 2016-0202/25/2016
Leveraged LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Market ParticipantsAddedAccounting Standards Update No. 2016-0202/25/2016
Minimum Lease PaymentsAddedAccounting Standards Update No. 2016-0202/25/2016
Not-for-Profit EntityAddedAccounting Standards Update No. 2016-0202/25/2016
Orderly TransactionAddedAccounting Standards Update No. 2016-0202/25/2016
Related PartiesAddedAccounting Standards Update No. 2016-0202/25/2016
Underlying AssetAddedAccounting Standards Update No. 2016-0202/25/2016
Variable Interest EntitySupersededAccounting Standards Update No. 2025-0305/12/2025
Variable Interest EntityAddedAccounting Standards Update No. 2016-0202/25/2016
842-50-05-1AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-15-1AmendedAccounting Standards Update No. 2023-0508/23/2023
842-50-15-1AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-25-1AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-25-2AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-30-1AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-30-2AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-35-1 through 35-21
AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-45-3AmendedAccounting Standards Update No. 2023-0508/23/2023
842-50-45-1 through 45-3
AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-50-1 through 50-3
AddedAccounting Standards Update No. 2016-0202/25/2016
842-50-50-2AmendedAccounting Standards Update No. 2022-0203/31/2022
842-50-50-2AmendedAccounting Standards Update No. 2016-1306/16/2016
842-50-55-1 through 55-33
AddedAccounting Standards Update No. 2016-0202/25/2016
Source downloaded (UTC): 2026-09-10T01:58:06.448Z to 2026-09-10T01:58:06.448Z Record version: sha256:ec196847912d47db51f085fb8e2623efa7196d7d2b4d58f078e891f3719a4a95 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/842/50/#05-overview-and-background) SEC content: no ##### [842-50-05-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:06.448Z to 2026-09-10T01:58:06.448Z Record version: sha256:5e50f6fc71ae0cdf45f16b9990c2e08d915d92ea65b37fecc3266f58052e2a10 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic addresses accounting for [leases](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 meet the definition of a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date."). Source downloaded (UTC): 2026-09-10T01:58:09.284Z to 2026-09-10T01:58:09.284Z Record version: sha256:9091a875609c6873c56a2833ded3b03f163fc1ec71616972bac8a49c2bdec815 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-15: 15 Scope and Scope Exceptions [Read section](https://asc.understandingaccounting.org/asc/842/50/#15-scope-and-scope-exceptions) SEC content: no ##### [842-50-15-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-15-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:09.284Z to 2026-09-10T01:58:09.284Z Record version: sha256:7e49666ba02522fc00a7bf7e893b48f5f075467e2dd72c0705a10e9055284741 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic addresses accounting for [leases](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 meet the criteria in transition paragraph [842-10-65-1(z)](https://asc.understandingaccounting.org/asc/842/10/#842-10-65-1). If a [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.") exercises an option to extend a lease that meets the criteria in transition paragraph [842-10-65-1(z)](https://asc.understandingaccounting.org/asc/842/10/#842-10-65-1) that it was not previously reasonably assured of exercising, the exercise of that option shall be considered a [lease modification](https://asc.understandingaccounting.org/glossary/l/#lease-modification "A change to the terms and conditions of a contract that results in a change in the scope of or the consideration for a lease (for example, a change to the terms and conditions of the contract that adds or terminates the right to use one or more underlying assets or extends or shortens the contractual lease term).") as described in paragraph [842-10-65-1(z)](https://asc.understandingaccounting.org/asc/842/10/#842-10-65-1). A [joint venture](https://asc.understandingaccounting.org/glossary/j/#joint-venture "An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.") formation accounted for in accordance with Subtopic 805-60 shall apply the guidance in this Subtopic applicable to the acquiring entity in a [business combination](https://asc.understandingaccounting.org/glossary/b/#business-combination "A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. See also Acquisition by a Not-for-Profit Entity."). The joint venture shall be viewed as analogous to the acquiring entity in a business combination, and any recognized businesses and/or assets shall be viewed as analogous to an [acquiree](https://asc.understandingaccounting.org/glossary/a/#acquiree "The business or businesses that the acquirer obtains control of in a business combination. This term also includes a nonprofit activity or business that a not-for-profit acquirer obtains control of in an acquisition by a not-for-profit entity."). Source downloaded (UTC): 2026-09-10T01:58:14.003Z to 2026-09-10T01:58:14.003Z Record version: sha256:d6d6d1aff1ea242d159b738fda0edba6b1e16d4b591e396b2f0af0946dfd2a51 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-25: 25 Recognition [Read section](https://asc.understandingaccounting.org/asc/842/50/#25-recognition) SEC content: no ##### [842-50-25-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-25-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:14.003Z to 2026-09-10T01:58:14.003Z Record version: sha256:5ef10122a14a0897a8161e382d0561450ba5c9bea3b10a082eccb211aa4b73a7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A [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.") shall record its investment in a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date."). The net of the balances of the following accounts as measured in accordance with this Subtopic shall represent the lessor's initial and continuing investment in leveraged leases: 1. a Rentals receivable 2. b Investment-tax-credit receivable 3. c [Estimated residual value](https://asc.understandingaccounting.org/glossary/e/#estimated-residual-value "The estimated fair value of the leased property at the end of the lease term.") of the leased asset 4. d Unearned and deferred income. #### Leveraged Lease Acquired in a Business Combination or an Acquisition by a Not-for-Profit Entity ##### [842-50-25-2](https://asc.understandingaccounting.org/asc/842/50/#842-50-25-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:14.003Z to 2026-09-10T01:58:14.003Z Record version: sha256:dcf5486765ef126e63678be1a6a9c3a9802a5129cbf724e32213a858e4ac4f4d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In a business combination or an [acquisition by a not-for-profit entity](https://asc.understandingaccounting.org/glossary/a/#acquisition-by-a-not-for-profit-entity "A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer's financial statements. When applicable guidance in Topic 805 is applied by a not-for-profit entity, the term business combination has the same meaning as this term has for a for-profit entity. Likewise, a reference to business combinations in guidance that links to Topic 805 has the same meaning as a reference to acquisitions by not-for-profit entities."), the acquiring entity shall retain the classification of the acquired entity's investment as a [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 a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") at the date of the combination. The net investment of the acquired leveraged lease shall be disaggregated into its component parts, namely net rentals receivable, [estimated residual value](https://asc.understandingaccounting.org/glossary/e/#estimated-residual-value "The estimated fair value of the leased property at the end of the lease term."), and unearned income including discount to adjust other components to present value. Source downloaded (UTC): 2026-09-10T01:58:17.067Z to 2026-09-10T01:58:17.067Z Record version: sha256:a32f47f93a93fffd1cc85153863344c0113248d89087a3845c10a93d2717c517 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-30: 30 Initial Measurement [Read section](https://asc.understandingaccounting.org/asc/842/50/#30-initial-measurement) SEC content: no ##### [842-50-30-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-30-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:17.067Z to 2026-09-10T01:58:17.067Z Record version: sha256:36a6a9267ca1e3e84004aeaced6fa3676e9e63d8c81018e9e9797b92d0caac88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A [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.") shall initially measure its investment in a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") net of the nonrecourse debt (as discussed in paragraph [842-50-25-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-25-1)). The net of the balances of the following accounts shall represent the initial and continuing investment in leveraged leases: 1. a Rentals receivable, net of that portion of the rental applicable to principal and interest on the nonrecourse debt. 2. b A receivable for the amount of the investment tax credit to be realized on the transaction. 3. c The [estimated residual value](https://asc.understandingaccounting.org/glossary/e/#estimated-residual-value "The estimated fair value of the leased property at the end of the lease term.") of the leased asset. The estimated residual value shall not exceed the amount estimated at [lease inception](https://asc.understandingaccounting.org/glossary/l/#lease-inception "The date of the lease agreement or commitment, if earlier. For purposes of this definition, a commitment shall be in writing, signed by the parties in interest to the transaction, and shall specifically set forth the principal provisions of the transaction. If any of the principal provisions are yet to be negotiated, such a preliminary agreement or commitment does not qualify for purposes of this definition.") except if 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.") agreement includes a provision to escalate [minimum lease payments](https://asc.understandingaccounting.org/glossary/m/#minimum-lease-payments "Minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property, excluding both of the following: Contingent rentals Any guarantee by the lessee of the lessor's debt and the lessee's obligation to pay (apart from the rental payments) executory costs such as insurance, maintenance, and taxes in connection with the leased property. If the lease contains a bargain purchase option, only the minimum rental payments over the lease term and the payment called for by the bargain purchase option are required to be included in the minimum lease payments. Otherwise, minimum lease payments include all of the following: The minimum rental payments called for by the lease over the lease term. Any guarantee of the residual value at the expiration of the lease term, whether or not payment of the guarantee constitutes a purchase of the leased property or of rental payments beyond the lease term by the lessee (including a third party related to the lessee) or a third party unrelated to either the lessee or the lessor, provided the third party is financially capable of discharging the obligations that may arise from the guarantee. If the lessor has the right to require the lessee to purchase the property at termination of the lease for a certain or determinable amount, that amount is required to be considered a lessee guarantee of the residual value. If the lessee agrees to make up any deficiency below a stated amount in the lessor's realization of the residual value, the residual value guarantee to be included in the minimum lease payments is required to be the stated amount, rather than an estimate of the deficiency to be made up. Any payment that the lessee must make or can be required to make upon failure to renew or extend the lease at the expiration of the lease term, whether or not the payment would constitute a purchase of the leased property. Note that the definition of lease term includes all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at lease inception, to be reasonably assured. If the lease term has been extended because of that provision, the related penalty is not included in minimum lease payments. Payments made before the beginning of the lease term. The lessee is required to use the same interest rate to accrete payments to be made before the beginning of the lease term that it uses to discount lease payments to be made during the lease term. Fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transaction. Such fees are required to be included as part of minimum lease payments (but not included in the fair value of the leased property). Lease payments that depend on a factor directly related to the future use of the leased property, such as machine hours of use or sales volume during the lease term, are contingent rentals and, accordingly, are excluded from minimum lease payments in their entirety. However, lease payments that depend on an existing index or rate, such as the Consumer Price Index or the prime interest rate, are required to be included in minimum lease payments based on the index or rate existing at lease inception; any increases or decreases in lease payments that result from subsequent changes in the index or rate are contingent rentals and, thus, affect the determination of income as accruable.") either for increases in construction or acquisition cost of the leased property or for increases in some other measure of cost or value (such as general price levels) during the construction or preacquisition period. In that case, the effect of any increases that have occurred shall be considered in the determination of the estimated residual 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 inception. 4. d Unearned and deferred income consisting of both of the following: 1. 1 The estimated pretax lease income (or loss), after deducting initial direct costs, remaining to be allocated to income 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."). 2. 2 The investment tax credit remaining to be allocated to income over the lease term. #### Leveraged Lease Acquired in a Business Combination or an Acquisition by a Not-for-Profit Entity ##### [842-50-30-2](https://asc.understandingaccounting.org/asc/842/50/#842-50-30-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:17.067Z to 2026-09-10T01:58:17.067Z Record version: sha256:1239fc68480830a99be35ad248e72b4e1a781f22f87c7557329022cf34bb3156 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In a business combination or an [acquisition by a not-for-profit entity](https://asc.understandingaccounting.org/glossary/a/#acquisition-by-a-not-for-profit-entity "A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer's financial statements. When applicable guidance in Topic 805 is applied by a not-for-profit entity, the term business combination has the same meaning as this term has for a for-profit entity. Likewise, a reference to business combinations in guidance that links to Topic 805 has the same meaning as a reference to acquisitions by not-for-profit entities."), the acquiring entity shall assign an amount to the acquired net investment in the [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") in accordance with the general guidance in Topic 805 on business combinations, based on the remaining future cash flows and giving appropriate recognition to the estimated future tax effects of those cash flows. Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:6bdb3ce916d358df732f0fc1636f15b97bb842b848aeeef8f8974a95bf5ae285 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-35: 35 Subsequent Measurement [Read section](https://asc.understandingaccounting.org/asc/842/50/#35-subsequent-measurement) SEC content: no #### Leveraged Lease Acquired in a Business Combination or an Acquisition by a Not-for-Profit Entity ##### [842-50-35-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:3b400b32de60753a2b15d267a65f4ccafb35eaf71859f3b984bb0d9ad7c6040c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In a business combination or an [acquisition by a not-for-profit entity](https://asc.understandingaccounting.org/glossary/a/#acquisition-by-a-not-for-profit-entity "A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer's financial statements. When applicable guidance in Topic 805 is applied by a not-for-profit entity, the term business combination has the same meaning as this term has for a for-profit entity. Likewise, a reference to business combinations in guidance that links to Topic 805 has the same meaning as a reference to acquisitions by not-for-profit entities."), the acquiring entity shall subsequently account for its acquired investment as a [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 a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") in accordance with the guidance in this Subtopic as it would for any other leveraged lease. #### Income Recognition on a Leveraged Lease ##### [842-50-35-2](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:0aef6b2b8ef64adb51a14e9c9bc9eee6b162e9090f39d03b7396560b7ce83448 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The investment in [leveraged leases](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") minus deferred taxes arising from differences between pretax accounting income and taxable income shall represent the [lessor's](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.") net investment in leveraged leases for purposes of computing periodic net income from the leveraged lease. Given the original investment and using the projected cash receipts and disbursements over the term 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."), the rate of return on the net investment in the years in which it is positive shall be computed. The rate is that rate that, when applied to the net investment in the years in which the net investment is positive, will distribute the net income to those years and is distinct from the interest rate implicit in the lease. In each year, whether positive or not, the difference between the net cash flow and the amount of income recognized, if any, shall serve to increase or reduce the net investment balance. The use of the term _years_ is not intended to preclude application of the accounting prescribed in this paragraph to shorter accounting periods. ##### [842-50-35-3](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:dcf82d47d01c5a1ef20ec127b45fb7691dea4196430009503423ac8cb1067b14 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The net income (or loss) that a lessor recognizes on a leveraged lease shall be composed of the following three elements: 1. a Pretax lease income (or loss) 2. b Investment tax credit 3. c Tax effect of pretax lease income (or loss). ##### [842-50-35-4](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:f4231bf055e87ab9b0907c1fe2f1eb95dff62338127338a1182ca5b37f7d7b26 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The pretax lease income (or loss) and investment tax credit elements shall be allocated in proportionate amounts from the unearned and deferred income included in the lessor's net investment (as described in paragraph [842-50-30-1(d)](https://asc.understandingaccounting.org/asc/842/50/#842-50-30-1)). The tax effect of the pretax lease income (or loss) recognized shall be reflected in tax expense for the year. The tax effect of the difference between pretax accounting income (or loss) and taxable income (or loss) for the year shall be charged or credited to deferred taxes. ##### [842-50-35-5](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:47af9f6c829c9fe75d42b32c386327d2a84e8fdd583ea021194e05ad8766479d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If, at any time during 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.") the application of the method prescribed in this Subtopic would result in a loss being allocated to future years, that loss shall be recognized immediately. This situation might arise in circumstances in which one of the important assumptions affecting net income is revised (see paragraphs [842-50-35-6 through 35-15](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-6) ). ##### [842-50-35-6](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:ba8040cd9a97c0169764a40b347266b8cb2c07ff87af369cf514d925f5913251 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Any [estimated residual value](https://asc.understandingaccounting.org/glossary/e/#estimated-residual-value "The estimated fair value of the leased property at the end of the lease term.") and all other important assumptions affecting estimated total net income from the [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") shall be reviewed at least annually. The rate of return and the allocation of income to positive investment years shall be recalculated from [lease inception](https://asc.understandingaccounting.org/glossary/l/#lease-inception "The date of the lease agreement or commitment, if earlier. For purposes of this definition, a commitment shall be in writing, signed by the parties in interest to the transaction, and shall specifically set forth the principal provisions of the transaction. If any of the principal provisions are yet to be negotiated, such a preliminary agreement or commitment does not qualify for purposes of this definition.") following the method described in paragraphs [842-50-35-2 through 35-4](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-2) and using the revised assumption if, during 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."), any of the following conditions occur: 1. a The estimate of the residual value is determined to be excessive, and the decline in the residual value is judged to be other than temporary. 2. b The revision of another important assumption changes the estimated total net income from 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."). 3. c The projected timing of the income tax cash flows is revised. ##### [842-50-35-7](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:66bd238aff17deda27ecb78b26d97a140bc720850afda966b239c574bc53ea0b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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.") shall update all assumptions used to calculate total and periodic income if the lessor is performing a recalculation of the leveraged lease. That recalculation shall include actual cash flows up to the date of the recalculation and projected cash flows following the date of recalculation. ##### [842-50-35-8](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:187aac2fbc40adb13348e4143f8f03a7fc696c3ff31a8d21719606650e371ddf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The accounts constituting the net investment balance shall be adjusted to conform to the recalculated balances, and the change in the net investment shall be recognized as a gain or loss in the year in which the assumption is changed. The gain or loss shall be recognized as follows: 1. a The pretax gain or loss shall be included in income from continuing operations before income taxes in the same line item in which leveraged lease income is recognized. 2. b The tax effect of the gain or loss shall be included in the income tax line item. 3. c An upward adjustment of the estimated residual value (including any guaranteed portion) shall not be made. ##### [842-50-35-9](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:d30da50256c3d2831386b59fc084d91cc1f530ee9a9bdf55025949b3664769d4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The projected timing of income tax cash flows generated by the leveraged lease is an important assumption and shall be reviewed annually, or more frequently, if events or changes in circumstances indicate that a change in timing has occurred or is projected to occur. The income effect of a change in the income tax rate shall be recognized in the first accounting period ending on or after the date on which the legislation effecting a rate change becomes law. ##### [842-50-35-10](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:5563fbd983896ddf998071e522fd13a56a9b04fc55c45452046d2bf0872048cb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A revision of the projected timing of the income tax cash flows applies only to changes or projected changes in the timing of income taxes that are directly related to the leveraged lease transaction. For example, a change in timing or projected timing of the tax benefits generated by a leveraged lease as a result of any of the following circumstances would require a recalculation because that change in timing is directly related to that lease: 1. a An interpretation of the tax law 2. b A change in the lessor's assessment of the likelihood of prevailing in a challenge by the taxing authority 3. c A change in the lessor's expectations about settlement with the taxing authority. ##### [842-50-35-11](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:b35a5a69fbee17fdd6c430a0b038ef5275023990b934bcf8c45b9223a3a73f82 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In contrast, as discussed in paragraph [842-50-35-20](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-20), a change in timing of income taxes solely as a result of an alternative minimum tax credit or insufficient taxable income of the lessor would not require a recalculation of a leveraged lease because that change in timing is not directly related to that lease. A recalculation would not be required unless there is an indication that the previous assumptions about total after-tax net income from the leveraged lease were no longer valid. ##### [842-50-35-12](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:e8fb9b7c20e144df4a9269ba99cad7293c0d8dff7e0d9b8a05598acf81e88c99 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Tax positions shall be reflected in the lessor's initial calculation or subsequent recalculation on the recognition, measurement, and derecognition criteria in paragraphs [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6), [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7), and [740-10-40-2](https://asc.understandingaccounting.org/asc/740/10/#740-10-40-2). The determination of when a tax position no longer meets those criteria is a matter of individual facts and circumstances evaluated in light of all available evidence. ##### [842-50-35-13](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:f31f79dd995d908baad0bd660afa7c4a5ca720ee66cc7c8d04e48e3369828257 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the lessor expects to enter into a settlement of a tax position relating to a leveraged lease with a taxing authority, the cash flows following the date of recalculation shall include projected cash flows between the date of the recalculation and the date of any projected settlement and a projected settlement amount at the date of the projected settlement. ##### [842-50-35-14](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:b9bbdf1a7eccf3db7e794f227226b757ac781ab9295746e7dc4b16213c7197c5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The recalculation of income from the leveraged lease shall not include interest or penalties in the cash flows from the leveraged lease. ##### [842-50-35-15](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:0bcb6664b5256cff97d46d5f441f111ace01adc618f22b568ac7a2f7aed50778 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Advance payments and deposits made with a taxing authority shall not be considered an actual cash flow of the leveraged lease; rather, those payments and deposits shall be included in the projected settlement amount. #### Effect of Alternative Minimum Tax ##### [842-50-35-16](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:f5119705dbc47b89eefe300fc395d9f52868f6893b5b7090d048d6ba1f467df8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity shall include assumptions about the effect of the alternative minimum tax, considering its consolidated tax position, in [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") computations. ##### [842-50-35-17](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:6cde3d7f9ef1f3c654771a5bbfdd8669c3b9e5f4b13fbb85c6a99db922aa0a09 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Any difference between alternative minimum tax depreciation and the tax depreciation assumed in the leveraged lease or between income recognition for financial reporting purposes and alternative minimum tax income could, depending on the [lessor's](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.") overall tax situation, result in alternative minimum tax or the utilization of alternative minimum tax credits. ##### [842-50-35-18](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:29e8dc4759117236fc291e1509bec4811713edd7857173793a3bdc8739a943a3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If alternative minimum tax is paid or an alternative minimum tax credit is utilized, the total cash flows from the leveraged lease could be changed and the lessor's net investment in the leveraged lease and income recognition would be affected. ##### [842-50-35-19](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:189d9f9dc376baa9e97c11097d1b50cf6a65e008540370d39ba06196e5285b03 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a change to the tax assumptions changes total estimated after-tax net income, the rate of return on the leveraged lease shall be recalculated from inception, the accounts constituting the lessor's net investment shall be adjusted, and a gain or loss shall be recognized in the year in which the assumption is changed. ##### [842-50-35-20](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:2bf9b02f8ee293db01e32685257e6a0db81e57f847709142bd458817445dce66 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. However, an entity whose tax position frequently varies between alternative minimum tax and regular tax shall not be required to recalculate the rate of return on the leveraged lease each year unless there is an indication that the original assumptions regarding total after-tax net income from 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.") are no longer valid. In that circumstance, the entity shall be required to revise the leveraged lease computations in any period in which total net income from the leveraged lease changes because of the effect of the alternative minimum tax on cash flows for the lease. #### Transfer of Minimum Rental Payments ##### [842-50-35-21](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:19.548Z to 2026-09-10T01:58:19.548Z Record version: sha256:77ad3e8d44694652ee2380ca9a4db0f1e987b43e5b197e5cf2bb26afec2cbc2a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If a [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.") sells substantially all of the minimum rental payments associated with a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") and retains an interest in the residual value of the leased asset, the lessor shall not recognize increases in the value 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.") residual to its estimated value over the remaining [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."). The lessor shall report any remaining interest thereafter at its carrying amount at the date of the sale of 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."). If it is determined subsequently that the [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.") of the residual value of the leased asset has declined below the carrying amount of the interest retained 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. Source downloaded (UTC): 2026-09-10T01:58:21.856Z to 2026-09-10T01:58:21.856Z Record version: sha256:4ae6b4ec48a9de3d195afa1ffa0630be90b957abb20ea3c720e713ca1a3ed000 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-45: 45 Other Presentation Matters [Read section](https://asc.understandingaccounting.org/asc/842/50/#45-other-presentation-matters) SEC content: no ##### [842-50-45-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-45-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:21.856Z to 2026-09-10T01:58:21.856Z Record version: sha256:281d1147c86693f6b4d6d09e0464060daff59a1e3364da1d57ce8faf2a475b90 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of presenting the investment in a [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") in the [lessor's](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.") balance sheet, the amount of related deferred taxes shall be presented separately (from the remainder of the net investment). In the income statement or the notes to that statement, separate presentation (from each other) shall be made of pretax income from the leveraged lease, the tax effect of pretax income, and the amount of investment tax credit recognized as income during the period. #### Income Taxes and Leveraged Leases ##### [842-50-45-2](https://asc.understandingaccounting.org/asc/842/50/#842-50-45-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:21.856Z to 2026-09-10T01:58:21.856Z Record version: sha256:92212558f79a13155228bc5de66362cfd45deff9f0a2118c51deaa29a268acd2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Integration of the results of income tax accounting for [leveraged leases](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") with the other results of accounting for income taxes under Topic 740 on income taxes is required if deferred tax credits related to leveraged leases are the only source (see paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) for recognition of a tax benefit for deductible temporary differences and carryforwards not related to leveraged leases. A valuation allowance is not necessary if deductible temporary differences and carryforwards will offset taxable amounts from future recovery of the net investment in the leveraged lease. However, to the extent that the amount of deferred tax credits for a leveraged lease as determined in accordance with this Subtopic differs from the amount of the deferred tax liability related to the leveraged lease that would otherwise result from applying the guidance in Topic 740, that difference is preserved and is not a source of taxable income for recognition of the tax benefit of deductible temporary differences and operating loss or tax credit carryforwards. ##### [842-50-45-3](https://asc.understandingaccounting.org/asc/842/50/#842-50-45-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:21.856Z to 2026-09-10T01:58:21.856Z Record version: sha256:51933b46e702aab9bcf17c14aa394c80f0f3c14cdb034e668ae8d24290db3713 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic requires that the tax effect of any difference between the assigned value and the tax basis of a leveraged lease at the date of a business combination, an [acquisition by a not-for-profit entity](https://asc.understandingaccounting.org/glossary/a/#acquisition-by-a-not-for-profit-entity "A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer's financial statements. When applicable guidance in Topic 805 is applied by a not-for-profit entity, the term business combination has the same meaning as this term has for a for-profit entity. Likewise, a reference to business combinations in guidance that links to Topic 805 has the same meaning as a reference to acquisitions by not-for-profit entities."), or a [joint venture](https://asc.understandingaccounting.org/glossary/j/#joint-venture "An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.") formation shall not be accounted for as a deferred tax credit. Any tax effects included in unearned and deferred income as required by this Subtopic shall not be offset by the deferred tax consequences of other temporary differences or by the tax benefit of operating loss or tax credit carryforwards. However, deferred tax credits that arise after the date of a combination shall be accounted for in the same manner as for leveraged leases that were not acquired in a combination. Source downloaded (UTC): 2026-09-10T01:58:25.544Z to 2026-09-10T01:58:25.544Z Record version: sha256:232fad3c6f3380da1bc123facade90979f075d97cf60bd410282e747f54ad5be Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-50: 50 Disclosure [Read section](https://asc.understandingaccounting.org/asc/842/50/#50-disclosure) SEC content: no ##### [842-50-50-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-50-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:25.544Z to 2026-09-10T01:58:25.544Z Record version: sha256:8227e7f5c385422b7091ada11a81fcf71d079b2ab0ac56abe786f02f44291685 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If leveraged leasing is a significant part of the [lessor's](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.") business activities in terms of revenue, net income, or assets, the components of the net investment balance in [leveraged leases](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") as set forth in paragraph [842-50-25-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-25-1) shall be disclosed in the notes to financial statements. ##### [842-50-50-2](https://asc.understandingaccounting.org/asc/842/50/#842-50-50-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:25.544Z to 2026-09-10T01:58:25.544Z Record version: sha256:180200cdaac56e7c31e851bc7efd8d459fefd95e8df2f9f4b245e657dfc3caae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For guidance on disclosures about financing receivables, which include receivables relating to a lessor's rights to payments from leveraged leases, see the guidance in Subtopic 326-20 on financial instruments measured at amortized cost. ##### [842-50-50-3](https://asc.understandingaccounting.org/asc/842/50/#842-50-50-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:25.544Z to 2026-09-10T01:58:25.544Z Record version: sha256:e8a694e0d7cc37a3ffa2f054343a9507a037a089fcc9da9952939fc345ebf397 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If accounting for the effect on leveraged leases of the change in tax rates results in a significant variation from the customary relationship between income tax expense and pretax accounting income and the reason for that variation is not otherwise apparent, the lessor shall disclose the reason for that variation. Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:0ddd20b3dc68426adff66bf0277adacd268f237fc6461b1483bfdec8098fe1db Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/842/50/#55-implementation-guidance-and-illustrations) SEC content: no #### Implementation Guidance ##### [842-50-55-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:59aa6e5cca111ddc8d46a5239ed50f95146dfd26de6aa3c2555f513cf0b60875 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Although the carrying amount of an asset acquired previously may not differ significantly from its [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."), it is unlikely that the two will be the same. However, regulated utilities have argued that the carrying amounts of certain of their assets always equal the fair value based on the utility's ability to recover that cost in conjunction with a franchise to sell a related service in a specified area. That argument is not valid when considering the value of the asset to a third-party purchaser that does not own that franchise. ##### [842-50-55-2](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:9134e1700979b4677552055dff475f0167ee835794d293d54b98068f2761ccef Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A [delayed equity investment](https://asc.understandingaccounting.org/glossary/d/#delayed-equity-investment "In leveraged lease transactions that have been structured with terms such that the lessee's rent payments begin one to two years after lease inception, equity contributions the lessor agrees to make (in the lease agreement or a separate binding contract) that are used to service the nonrecourse debt during this brief period. The total amount of the lessor's contributions is specifically limited by the agreements.") frequently obligates 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.") to make up the shortfall between rent and debt service in the first several years of the transaction. The type of recourse debt resulting from the delayed equity investment does not contradict the notion of nonrecourse and, therefore, does not preclude [leveraged lease](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") accounting as long as other requirements of leveraged lease accounting are met. The lessor's related obligation should be recorded as a liability at present value at [lease inception](https://asc.understandingaccounting.org/glossary/l/#lease-inception "The date of the lease agreement or commitment, if earlier. For purposes of this definition, a commitment shall be in writing, signed by the parties in interest to the transaction, and shall specifically set forth the principal provisions of the transaction. If any of the principal provisions are yet to be negotiated, such a preliminary agreement or commitment does not qualify for purposes of this definition."). ##### [842-50-55-3](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:59913937a77babef7c6e87d5984a148ac51d6b42c088476a9c1a60ece84cc103 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Recognition of the liability would increase the lessor's net investment on which the lessor bases its pattern of income recognition. While the increase to the net investment results in an increase in income, it may be offset by the accrual of interest on the liability. ##### [842-50-55-4](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:d02c0b11d2bddbed71503f65089fc2fd23187ee0a19ed5c8a13cec181cfc2726 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The accounting for income taxes related to [leveraged leases](https://asc.understandingaccounting.org/glossary/l/#leveraged-lease "From the perspective of a lessor, a lease that was classified as a leveraged lease in accordance with the leases guidance in effect before the effective date and for which the commencement date is before the effective date.") set forth in this Subtopic is not consistent with the guidance in Topic 740 on income taxes. ##### [842-50-55-5](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:c44d879f2a4cba009ef13a3b79fe28fee7c841f07d36dc234f0de2d44ea08a62 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The integration of the results of accounting for income taxes related to leveraged leases with the other results of accounting for income taxes as required by Topic 740 is an issue if all of the following exist: 1. a The accounting for a leveraged lease requires recognition of deferred tax credits. 2. b The guidance in Topic 740 limits the recognition of a tax benefit for deductible temporary differences and carryforwards not related to the leveraged lease. 3. c Unrecognized tax benefits in this paragraph could offset taxable amounts that result from future recovery of the net investment in the leveraged lease. #### Illustrations ##### [842-50-55-6](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:aa7db35662eabffe73f48bce9adff36b4f4ca359d5f3a559c17175d57dcda525 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates a lessor's accounting for a leveraged lease in accordance with the guidance in this Subtopic. It also illustrates one way of meeting the disclosure requirements in paragraphs [842-50-45-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-45-1) and [842-50-50-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-50-1) as applied to a leveraged lease. The Example does not encompass all circumstances that may arise about leveraged leases; rather, the Example is based on a single instance of a leveraged lease. The elements of accounting and reporting illustrated for this Example of a leveraged lease are as follows: 1. a Cash flow analysis by years (see paragraph [842-50-55-8](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-8)) 2. b Allocation of annual cash flow to investment and income (see paragraph [842-50-55-9](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-9)) 3. c Journal entries for lessor's initial investment and first year of operation (see paragraph [842-50-55-10](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-10)) 4. d Financial statements including notes at end of second year (see paragraph [842-50-55-11](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-11)) 5. e Accounting for a revision in the estimated residual value of the leased asset assumed to occur in the eleventh year of the lease (from $200,000 to $120,000): 1. 1 Revised allocation of annual cash flow to investment and income (see paragraph [842-50-55-12](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-12)) 2. 2 Balances in investment accounts at beginning of the eleventh year before revised estimate (see paragraph [842-50-55-13](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-13)) 3. 3 Journal entries (see paragraph [842-50-55-14](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-14)) 4. 4 Adjustment of investment accounts (see paragraph [842-50-55-15](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-15)). ##### [842-50-55-7](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:4f5304978767bb65ed46562d63166cf64c3d75956f8ff88175db43543a3900c6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example has the following terms and assumptions. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-FFE32B68-D4FA-47F8-8DCA-50156C719AA2-low.gif) Cost of leased asset (equipment) "$1,000,000 " Lease term "15 years, dating from January 1, 1975" Lease rental payments "$90,000 per year (payable last day of each year)" Residual value "$200,000 estimated to be realized 1 year after lease termination; in the eleventh year of the lease the estimate is reduced to $120,000" Financing: Equity investment by lessor "$400,000 " Long-term nonrecourse debt "$600,000, bearing interest at 9% and repayable in annual installments (on last day of each year) of $74,435.30" Depreciation allowable to lessor for income tax purposes "7-year asset depreciation range life using double-declining-balance method for the first 2 years (with the half-year convention election applied in the first year) and sum-of-years digits method for remaining life, depreciated to $100,000 salvage value" "Lessor's income tax rate (federal and state)" 50.4% (assumed to continue in existence throughout the term of the lease) Investment tax credit "10% of equipment cost or $100,000 (realized by the lessor on last day of first year of lease)" Initial direct costs "For simplicity, initial direct costs have not been included in the illustration" ##### [842-50-55-8](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:fe82d2b46caecc9e0f902afb728c86d2c1c2a58fdb8f6b1e32c03d40e2a3bc5a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cash flow analysis by years follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-9EF71D09-A94A-42EB-8B66-2F87E40DB33F-low.gif) 1 2 3 4 5 6 7 8 9 Year Gross Lease Rentals and Residual Value Depreciation (for Income Tax Purposes) Loan Interest Payments Taxable Income (Loss) (Col. 1- 2- 3) Income Tax Credits (Charges) (Col. 4 × 50.4%) Loan Principal Payments Investment Tax Credit Realized Annual Cash Flow (Col. 1- 3 + 5 - 6 + 7) Cumulative Cash Flow Initial Investment - - - - - - - " $(400,000)" " $(400,000)" 1 " $90,000 " " $142,857 " " $54,000 " " $(106,857)" " $53,856 " " $20,435 " " $100,000 " " 169,421 " " (230,579)" 2 " 90,000 " " 244,898 " " 52,161 " " (207,059)" " 104,358 " " 22,274 " - " 119,923 " " (110,656)" 3 " 90,000 " " 187,075 " " 50,156 " " (147,231)" " 74,204 " " 24,279 " - " 89,769 " " (20,887)" 4 " 90,000 " " 153,061 " " 47,971 " " (111,032)" " 55,960 " " 26,464 " - " 71,525 " " 50,638 " 5 " 90,000 " " 119,048 " " 45,589 " " (74,637)" " 37,617 " " 28,846 " - " 53,182 " " 103,820 " 6 " 90,000 " " 53,061 " " 42,993 " " (6,054)" " 3,051 " " 31,442 " - " 18,616 " " 122,436 " 7 " 90,000 " - " 40,163 " " 49,837 " " (25,118)" " 34,272 " - " (9,553)" " 112,883 " 8 " 90,000 " - " 37,079 " " 52,921 " " (26,672)" " 37,357 " - " (11,108)" " 101,775 " 9 " 90,000 " - " 33,717 " " 56,283 " " (28,367)" " 40,719 " - " (12,803)" " 88,972 " 10 " 90,000 " - " 30,052 " " 59,948 " " (30,214)" " 44,383 " - " (14,649)" " 74,323 " 11 " 90,000 " - " 26,058 " " 63,942 " " (32,227)" " 48,378 " - " (16,663)" " 57,660 " 12 " 90,000 " - " 21,704 " " 68,296 " " (34,421)" " 52,732 " - " (18,857)" " 38,803 " 13 " 90,000 " - " 16,957 " " 73,043 " " (36,813)" " 57,478 " - " (21,248)" " 17,555 " 14 " 90,000 " - " 11,785 " " 78,215 " " (39,420)" " 62,651 " - " (23,856)" " (6,301)" 15 " 90,000 " - " 6,145 " " 83,855 " " (42,263)" " 68,290 " - " (26,698)" " (32,999)" 16 " 200,000 " " 100,000 " - " 100,000 " " (50,400)" - - " 149,600 " " 116,601 " Totals " $1,550,000 " " $1,000,000 " " $516,530 " " $33,470 " " $(16,869)" " $600,000 " " $100,000 " " $116,601 " ##### [842-50-55-9](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:497fce6f68e91853b2991863a3eb05255d64e437ac61c71a3d7df6003033b14d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Allocation of annual cash flow to investment and income follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-CED16695-B3B5-4C52-92CA-1455FC8B924E-low.gif) 1 2 3 4 5 6 7 Annual Cash Flow Components of Income (a) Year Lessor's Net Investment at Beginning of Year "Total (from Col. 8 of Paragraph 842-50-55-8)" Allocated to Investment Allocated to Income (b) Pretax Income Tax Effect of Pretax Income Investment Tax Credit 1 " $400,000 " " $169,421 " " $134,833 " " $34,588 " " $9,929 " " $(5,004)" " $29,663 " 2 " 265,167 " " 119,923 " " 96,994 " " 22,929 " " 6,582 " " (3,317)" " 19,664 " 3 " 168,173 " " 89,769 " " 75,227 " " 14,542 " " 4,174 " " (2,104)" " 12,472 " 4 " 92,946 " " 71,525 " " 63,488 " " 8,037 " " 2,307 " " (1,163)" " 6,893 " 5 " 29,458 " " 53,182 " " 50,635 " " 2,547 " 731 (368) " 2,184 " 6 " (21,177)" " 18,616 " " 18,616 " - - - - 7 " (39,793)" " (9,553)" " (9,553)" - - - - 8 " (30,240)" " (11,108)" " (11,108)" - - - - 9 " (19,132)" " (12,803)" " (12,803)" - - - - 10 " (6,329)" " (14,649)" " (14,649)" - - - - 11 " 8,320 " " (16,663)" " (17,382)" 719 206 (104) 617 12 " 25,702 " " (18,857)" " (21,079)" " 2,222 " 637 (321) " 1,906 " 13 " 46,781 " " (21,248)" " (25,293)" " 4,045 " " 1,161 " (585) " 3,469 " 14 " 72,074 " " (23,856)" " (30,088)" " 6,232 " " 1,789 " (902) " 5,345 " 15 " 102,162 " " (26,698)" " (35,532)" " 8,834 " " 2,536 " " (1,278)" " 7,576 " 16 " 137,694 " " 149,600 " " 137,694 " " 11,906 " " 3,418 " " (1,723)" " 10,211 " Totals " $516,601 " " $400,000 " " $116,601 " " $33,470 " " $(16,869)" " $100,000 " (a) "Lease income is recognized as 8.647% of the unrecovered investment at the beginning of each year in which the net investment is positive. The rate is that rate which, if applied to the net investment in the years in which the net investment is positive, will distribute the net income (net cash flow) to those years." (b) Each component is allocated among the years of positive net investment in proportion to the allocation of net income in column 4. ##### [842-50-55-10](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:90c5175dbcb951d7f639d6ecc7e934775f6afd18b02e9e179d20d2a0cdb6dbc0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Illustrative journal entries for the year ending December 31, 1975, follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-CC230BAB-6366-457C-B1CB-BF266472CE3C-low.gif) Lessor's Initial Investment Debit Credit "Rentals receivable (table in paragraph 842-50-55-8, total of column 1 minus residual value, minus totals of columns 3 and 6)" " $233,470 " "Investment tax credit receivable (table in paragraph 842-50-55-8, column 7)" " 100,000 " Estimated residual value (paragraph 842-50-55-7) " 200,000 " "Unearned and deferred income (table in paragraph 842-50-55-9, totals of columns 5 and 7)" " $133,470 " Cash " 400,000 " Record lessor's initial investment First Year of Operation Journal Entry 1 Cash " 15,565 " "Rentals receivable (table in paragraph 842-50-55-8, column 1 minus columns 3 and 6)" " 15,565 " Collection of first year's net rental Journal Entry 2 Cash (a) " 100,000 " "Investment tax credit receivable (table in paragraph 842-50-55-8, column 7)" " 100,000 " Receipt of investment tax credit Journal Entry 3 Unearned and deferred income " 9,929 " "Income from leveraged leases (table in paragraph 842-50-55-9, column 5)" " 9,929 " Recognition of first year's portion of pretax income allocated in the same proportion as the allocation of total income "(34,588 ÷ 116,601) × 33,470 = 9,929 " Journal Entry 4 Unearned and deferred income " 29,663 " "Investment tax credit recognized (table in paragraph 842-50-55-9, column 7)" " 29,663 " Recognition of first year's portion of investment tax credit allocated in the same proportion as the allocation of total income "(34,588 ÷ 116,601) × 100,000 = 29,663" Journal Entry 5 "Cash (table in paragraph 842-50-55-8, column 5) (a)" " 53,856 " "Income tax expense (table in paragraph 842-50-55-9, column 6)" " 5,004 " Deferred taxes " 58,860 " "To record receipt of first year's tax credit from lease operation, to charge income tax expense for tax effect of pretax accounting income, and to recognize as deferred taxes the tax effect of the difference between pretax accounting income and the tax loss for the year, calculated as follows:" "Tax loss (table in paragraph 842-50-55-8, column 4)" " $(106,857)" Pretax accounting income " 9,929 " Difference " $(116,786)" "Deferred taxes ($116,786 × 50.4%)" " $58,860 " (a) "Receipts of the investment tax credit and other tax benefits are shown as cash receipts for simplicity only. Those receipts probably would not be in the form of immediate cash inflow. Instead, they likely would be in the form of reduced payments of taxes on other income of the lessor or on the combined income of the lessor and other entities whose operations are joined with the lessor's operations in a consolidated tax return." ##### [842-50-55-11](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:6c1a5ce864d498c10864e57fff12313b19392825adc204150cdf641c54d0707a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following are illustrative partial financial statements including notes. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-232D2D17-56C5-44BD-AAB3-FAE72480042A-low.gif) BALANCE SHEET ASSETS LIABILITIES "December 31," "December 31," 1976 1975 1976 1975 Investment in leveraged leases " $334,708 " " $324,027 " Deferred taxes arising from leveraged leases " $166,535 " " $58,860 " - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-46CBAE56-7799-402D-95A6-16CCD21B5BFA-low.gif) INCOME STATEMENT (Ignoring all income and expense items other than those relating to leveraged leasing) 1976 1975 Income from leveraged leases " $6,582 " " $9,929 " Income before taxes and investment tax credit " 6,582 " " 9,929 " Less: Income tax expense (a) " (3,317)" " (5,004)" " 3,265 " " 4,925 " Investment tax credit recognized (a) " 19,664 " " 29,663 " Net income " $22,929 " " $34,588 " (a) "These two items may be netted for purposes of presentation in the income statement, provided that the separate amounts are disclosed in a note to financial statements." The following are notes to the illustrative financial statements included in this Example. - Investment in Leveraged Leases - Entity is the lessor in a leveraged lease agreement entered into in 1975 under which mining equipment having an estimated economic life of 18 years was leased for a term of 15 years. Entity's equity investment represented 40 percent of the purchase price; the remaining 60 percent was furnished by third-party financing in the form of long-term debt that provides for no recourse against Entity and is secured by a first lien on the property. At the end of the lease term, the equipment is turned back to Entity. The residual value at that time is estimated to be 20 percent of cost. For federal income tax purposes, Entity receives the investment tax credit and has the benefit of tax deductions for depreciation on the entire leased asset and for interest on the long-term debt. During the early years of the lease, those deductions exceed the lease rental income, and substantial excess deductions are available to be applied against Entity's other income. In the later years of the lease, rental income will exceed the deductions and taxes will be payable. Deferred taxes are provided to reflect this reversal. Entity's net investment in leveraged leases is composed of the following elements. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-41FA9B43-E031-4667-89B3-92679734C109-low.gif) "December 31," 1976 1975 Rentals receivable (net of principal and interest on the nonrecourse debt) " $202,340 " " $217,905 " Estimated residual value of leased assets " 200,000 " " 200,000 " Less: Unearned and deferred income " (67,632)" " (93,878)" Investment in leveraged leases " 334,708 " " 324,027 " Less: Deferred taxes arising from leveraged leases " (166,535)" " (58,860)" Net investment in leveraged leases " $168,173 " " $265,167 " ##### [842-50-55-12](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:a7170117eee1e579c3ac68909bc2286067ea6e7283a5d9710e93bfba049334db Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Allocation of annual cash flow to investment and income follows, revised to include new residual value estimate. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-DD5345B2-7464-4853-B846-607992FF5E07-low.gif) Annual Cash Flow Components of Income Year Lessor's Net Investment at Beginning of Year Total Allocated to Investment Allocated to Income (a) Pretax Loss Tax Effect of Pretax Loss Investment Tax Credit 1 " $400,000 " " $169,421 " " $142,458 " " $26,963 " " $(16,309)" " $8,220 " " $35,052 " 2 " 257,542 " " 119,923 " " 102,563 " " 17,360 " " (10,501)" " 5,293 " " 22,568 " 3 " 154,979 " " 89,769 " " 79,323 " " 10,446 " " (6,319)" " 3,184 " " 13,581 " 4 " 75,656 " " 71,525 " " 66,425 " " 5,100 " " (3,085)" " 1,555 " " 6,630 " 5 " 9,231 " " 53,182 " " 52,560 " 622 (377) 190 809 6 " (43,329)" " 18,616 " " 18,616 " - - - - 7 " (61,945)" " (9,553)" " (9,553)" - - - - 8 " (52,392)" " (11,108)" " (11,108)" - - - - 9 " (41,284)" " (12,803)" " (12,803)" - - - - 10 " (28,481)" " (14,649)" " (14,649)" - - - - 11 " (13,832)" " (16,663)" " (16,663)" - - - - 12 " 2,831 " " (18,857)" " (19,048)" 191 (115) 58 248 13 " 21,879 " " (21,248)" " (22,723)" " 1,475 " (892) 450 " 1,917 " 14 " 44,602 " " (23,856)" " (26,862)" " 3,006 " " (1,819)" 916 " 3,909 " 15 " 71,464 " " (26,698)" " (31,515)" " 4,817 " " (2,914)" " 1,469 " " 6,262 " 16 " 102,979 " " 109,920 " " 102,979 " " 6,941 " " (4,199)" " 2,116 " " 9,024 " Totals " $476,921 " " $400,000 " " $76,921 " " $(46,530)" " $23,451 " " $100,000 " (a) The revised allocation rate is 6.741%. ##### [842-50-55-13](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:682272e6594c3ac251a4f54c0e080c66216cf1376fd1d4c6454a385ac358be3e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Balances in investment accounts before revised estimate of residual value follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-8984F43E-1B40-4351-8C53-B80FD11A6AE9-low.gif) 1 2 3 4 5 6 7 "Unearned and Deferred Income" Rentals Receivable (a) Estimated Residual Value Investment Tax Credit Receivable Pretax Income (Loss) (b) Investment Tax Credit (c) Deferred Taxes (d) Net Investment (Col. 1+2+3) less (Col. 4 + 5 + 6) Initial investment " $233,470 " " $200,000 " " $100,000 " " $33,470 " " $100,000 " $- " $400,000 " Changes in year of operation 1 " (15,565)" - " (100,000)" " (9,929)" " (29,663)" " 58,860 " " (134,833)" 2 " (15,565)" - - " (6,582)" " (19,664)" " 107,675 " " (96,994)" 3 " (15,565)" - - " (4,174)" " (12,472)" " 76,308 " " (75,227)" 4 " (15,565)" - - " (2,307)" " (6,893)" " 57,123 " " (63,488)" 5 " (15,565)" - - (731) " (2,184)" " 37,985 " " (50,635)" 6 " (15,565)" - - - - " 3,051 " " (18,616)" 7 " (15,565)" - - - - " (25,118)" " 9,553 " 8 " (15,564)" - - - - " (26,672)" " 11,108 " 9 " (15,564)" - - - - " (28,367)" " 12,803 " 10 " (15,565)" - - - - " (30,214)" " 14,649 " "Balances, beginning of eleventh year" " $77,822 " " $200,000 " $- " $9,747 " " $29,124 " " $230,631 " " $8,320 " (a) "Table in paragraph 842-50-55-8, column 1, excluding residual value, minus columns 3 and 6." (b) "Table in paragraph 842-50-55-9, column 5." (c) "Table in paragraph 842-50-55-9, column 7." (d) 50.4% of difference between taxable income (loss) in column 4 of the table in paragraph 842-50-55-8 and pretax accounting income (loss) in column 5 of the table in paragraph 842-50-55-9. ##### [842-50-55-14](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:1ca2cb6c4e92fb51d8840cc3d02e664df399fa3f2929c159aaf7e754a9e4e66d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Illustrative journal entries involving a reduction in residual value follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-9C698711-4325-4D28-ADFF-3DAB1E04DE7B-low.gif) Debit Credit Journal Entry 1 Pretax income (or loss) " $60,314 " Unearned and deferred income " 27,450 " Pretax income (loss): Balance at end of tenth year " $9,747 " (a) Revised balance " (9,939)" (b) Adjustment " (19,686)" Deferred investment tax credit: Balance at end of tenth year " 29,124 " (c) Revised balance " 21,360 " (d) Adjustment " (7,764)" Investment tax credit recognized " $7,764 " Estimated residual value " 80,000 " To record: a. The cumulative effect on pretax income and the effect on future income resulting from the decrease in estimated residual value: Reduction in estimated residual value " $80,000 " Less portion attributable to future years (unearned and deferred income) " (19,686)" Cumulative effect (charged against current income) " $60,314 " b. The cumulative and future effect of the change in allocation of the investment tax credit resulting from the reduction in estimated residual value Journal Entry 2 Deferred taxes " 30,398 " Income tax expense " 30,398 " To recognize deferred taxes for the difference between pretax accounting income (or loss) and taxable income (or loss) for the effect of the reduction in estimated residual value: Pretax accounting loss per Journal Entry 1 " $(60,314)" Tax income (or loss) - Difference " $(60,314)" "Deferred taxes ($60,314 × 50.4%)" " $(30,398)" (a) "Table in paragraph 842-50-55-13, column 4." (b) "Table in paragraph 842-50-55-12, total of column 5 minus amounts applicable to the first 10 years." (c) "Table in paragraph 842-50-55-13, column 5." (d) "Table in paragraph 842-50-55-12, total of column 7 minus amounts applicable to the first 10 years." ##### [842-50-55-15](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:bea38d03ae0c9284bd56bec7ae66c56ce22a9bb73997102281f33b537954268f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Adjustment of investment accounts for revised estimates of residual value follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-A9C0590E-588B-4930-87F7-E3156BA18F4F-low.gif) "Unearned and Deferred Income" Net Investment Rentals Receivable Estimated Residual Value Pretax Income (Loss) Investment Tax Credit Deferred Taxes (Col. 1 + 2) less (Col. 3 + 4 + 5) "Balances, beginning of eleventh year (table in paragraph 842-50-55-13)" " $77,822 " " $200,000 " " $9,747 " " $29,124 " " $230,631 " " $8,320 " "Adjustment of estimated residual value and unearned and deferred income (table in paragraph 842-50-55-14, Journal Entry 1)" - " (80,000)" " (19,686)" " (7,764)" - " (52,550)" "Adjustment of deferred taxes for the cumulative effect on pretax accounting income (table in paragraph 842-50-55-14, Journal Entry 2)" - - - - " (30,398)" " 30,398 " "Adjusted balances, beginning of eleventh year" " $77,822 " " $120,000 " " $(9,939)" " $21,360 " " $200,233 " " $(13,832)" (a) (a) "Table in paragraph 842-50-55-12, column 1." ##### [842-50-55-16](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:06d1022cec80ca9543eea54412291adfaefe343c05ac41da15f885bd899c84df Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates integration of the results of a lessor's income tax accounting for leveraged leases (in accordance with the guidance in this Subtopic) with the other results of accounting for income taxes as required by Topic 740. ##### [842-50-55-17](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:b2d03b8acad2715d4993348e717371ba0db12075ecc472027a4803be45153aaa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At the end of Year 1 (the current year), an entity has two temporary differences. ##### [842-50-55-18](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:c7f66a76c9eadd123ea18158149780dead07e89e41afe3f01509eda3094adc4d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The first temporary difference is for a leveraged lease that was entered into in a prior year. During Year 1, the enacted tax rate for Year 2 and thereafter changes from 40 percent to 35 percent. ##### [842-50-55-19](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:63d7436889a8ed42832f9a7383e02282d33f9b929fb5df9c7a081607757297c2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. After adjusting for the change in estimated total net income from the lease as a result of the change in tax rates, the components of the investment in the leveraged lease at the end of Year 1 are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-F4C4BF12-88B0-471E-8509-A73A2CAC66D7-low.gif) Net rentals receivable plus residual value minus unearned pretax income " $150,000 " Reduced by: Deferred investment tax credit " $9,000 " Deferred tax credits " 39,000 " " 48,000 " Net investment in leveraged lease for financial reporting " $102,000 " ##### [842-50-55-20](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:4ad1650734347f588f7ceb094edf5ce0a4b94699a42340f77a173065561e2093 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The second temporary difference is a $120,000 estimated liability for warranty expense that will result in a tax deduction in Year 5 when the liability is expected to be paid. Absent consideration of the deferred tax credits attributable to the leveraged lease, the weight of available evidence indicates that a valuation allowance is needed for the entire amount of the deferred tax asset related to that $120,000 deductible temporary difference. ##### [842-50-55-21](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:35e5b2c06a8e8f349ab85178c535bfbc841fc3542a64498dff6a06eb5a00effb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax basis of the investment in the leveraged lease at the end of Year 1 is $41,000. The amount of the deferred tax liability for that leveraged lease that would otherwise result from the application of guidance in Topic 740 on income taxes is determined as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-19BEB619-A8E0-4F8A-A7D5-EFF48DCD5776-low.gif) Net rentals receivable plus residual value minus unearned pretax income " $150,000 " Temporary difference for deferred investment tax credit " 9,000 " " 141,000 " Tax basis of leveraged lease " 41,000 " Temporary difference " $100,000 " Deferred tax liability (35 percent) " $35,000 " ##### [842-50-55-22](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:71f88e31b752207adcdcdb7448817a35033b57805ed212c9fc50d347dd3b3fbb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Loss carryback (to Year 2) and loss carryforward (to Year 20) of the $120,000 tax deduction for warranty expense in Year 5 would offset the $100,000 of taxable amounts resulting from future recovery of the net investment in the leveraged lease over the remainder of the lease term. ##### [842-50-55-23](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:e25a4ebee3270d6c769bc0b214856354573749f3761c0c160c52439f342b061e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At the end of Year 1, the entity recognizes a $42,000 ($120,000 at 35 percent) deferred tax asset and a related $7,000 valuation allowance. The effect is to recognize a $35,000 net deferred tax benefit for the reduction in deferred tax credits attributable to the leveraged lease. Deferred tax credits attributable to the leveraged lease determined under the guidance in this Subtopic are $39,000. However, the deferred tax liability determined is only $35,000. The $4,000 difference is not available for offsetting. ##### [842-50-55-24](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:54e027c8d83cee53abe944ea9694ab5436b2eef3fd1308f1a2750fa31b92e4f7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates how (in accordance with the guidance in paragraph [842-50-35-13](https://asc.understandingaccounting.org/asc/842/50/#842-50-35-13) and other paragraphs) a lessor would include advance payments and deposits in a recalculation of a leveraged lease resulting from a determination by the lessor that it would enter into a settlement of a tax position arising from a leveraged lease. ##### [842-50-55-25](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:f4cb495ed45f83f36e8d6f7c522e19e6e880cd93c4acb7005ed8729de1762554 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example assumes that the lessor has concluded that the position originally taken on the tax return would meet the more-likely-than-not threshold in Subtopic 740-10 on income taxes. It also assumes that the lessor would conclude that the estimate of $50 for the projected lease-in, lease-out settlement is consistent with the measurement guidance in that Subtopic. ##### [842-50-55-26](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:1e92cee8b4e0ac7da8f9bc0c55fc93ac985ea8ce685f4a7959ec1402ab68fbc5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A lessor makes an advance payment of $25 on July 1, 2007, $10 of which is estimated to be associated with issues arising from a lease-in, lease-out transaction. On July 1, 2007, the lessor changes its assumption about the timing of the tax cash flows and projects a settlement with the Internal Revenue Service on September 1, 2009. The projected settlement would result in a payment to the taxing authority of $125 of which $50 is associated with the lease-in, lease-out transaction. On July 1, 2007, when the lessor recalculates the leveraged lease, the lessor would include a $50 cash flow on September 1, 2009, as a projected outflow in the leveraged lease recalculation. ##### [842-50-55-27](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:c67b9f9a6a125a8aa5c48d7e0240375e9beb0e92b352de5e56738ff710d3e161 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates one way that a lessor's investment in a leveraged lease might be valued by the acquiring entity in a business combination or an acquisition by a not-for-profit entity and the subsequent accounting for the investment in accordance with the guidance in this Subtopic. The elements of accounting and reporting illustrated for this Example are as follows: 1. a Acquiring entity's cash flow analysis by years (see paragraph [842-50-55-29](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-29)) 2. b Acquiring entity's valuation of investment in the leveraged lease (see paragraph [842-50-55-30](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-30)) 3. c Acquiring entity's allocation of annual cash flow to investment and income (see paragraph [842-50-55-31](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-31)) 4. d Journal entry for recording allocation of purchase price to net investment in the leveraged lease (see paragraph [842-50-55-32](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-32)) 5. e Journal entries for the year ending December 31, 1984 (Year 10 of the lease) (see paragraph [842-50-55-33](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-33)). ##### [842-50-55-28](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:3cfdce8b7d3b242c2a1416708183f973c36461276b09b6035cfc6f0801e8cb0f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example has the following terms and assumptions. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-38F4A110-5FDC-43C8-9628-C3C7CE1D17A2-low.gif) Cost of leased asset (equipment) "$1,000,000" Lease term "15 years, dating from January 1, 1975" Lease rental payments "$90,000 per year (payable last day of each year)" Residual value "$200,000 estimated to be realized 1 year after lease termination" Financing: Equity investment by lessor "$400,000" Long-term nonrecourse debt "$600,000, bearing interest at 9% and repayable in annual installments (on last day of each year) of $74,435.30" Depreciation allowable to lessor for income tax purposes "7-year asset depreciation range life using double-declining-balance method for the first 2 years (with the half-year convention election applied in the first year) and sum-of-years digits method for remaining life, depreciated to $100,000 salvage value" Lessor's income tax rate (federal and state) 50.4% (assumed to continue in existence throughout the term of the lease) Investment tax credit "10% of equipment cost or $100,000 (realized by the lessor on last day of first year of lease)" Initial direct costs "For simplicity, initial direct costs have not been included in the illustration" Date of business combination "January 1, 1982" Nontaxable transaction Tax status of business combination Appropriate interest rate for valuing net-of-tax return on investment 4½% ##### [842-50-55-29](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:9b9ebaf4bb0c4372125c6cae2242531a08d2901b30051584c5de300e6f7a535a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Acquiring entity's cash flow analysis by years follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-C465A644-8FE0-41A2-B8D5-658A76FD7D0D-low.gif) 1 2 3 4 5 6 7 Year Gross Lease Rentals and Residual Value Depreciation (for Income Tax Purposes) Loan Interest Payments "Taxable Income (Col. 1 - 2 - 3)" Income Tax (Charges) (Col. 4 × 50.4%) Loan Principal Payments Annual Cash Flow (Col. 1 - 3 + 5 - 6) 8 " $90,000 " - " $37,079 " " $52,921 " " $(26,672)" " $37,357 " " $(11,108)" 9 " 90,000 " - " 33,717 " " 56,283 " " (28,367)" " 40,719 " " (12,803)" 10 " 90,000 " - " 30,052 " " 59,948 " " (30,214)" " 44,383 " " (14,649)" 11 " 90,000 " - " 26,058 " " 63,942 " " (32,227)" " 48,378 " " (16,663)" 12 " 90,000 " - " 21,704 " " 68,296 " " (34,421)" " 52,732 " " (18,857)" 13 " 90,000 " - " 16,957 " " 73,043 " " (36,813)" " 57,478 " " (21,248)" 14 " 90,000 " - " 11,785 " " 78,215 " " (39,420)" " 62,651 " " (23,856)" 15 " 90,000 " - " 6,145 " " 83,855 " " (42,263)" " 68,290 " " (26,698)" 16 " 200,000 " " $100,000 " - " 100,000 " " (50,400)" - " 149,600 " Totals " $920,000 " " $100,000 " " $183,497 " " $636,503 " " $(320,797)" " $411,988 " " $3,718 " ##### [842-50-55-30](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:1c1812aa817a23520c9355b9a11b3a3556f812d7c1b36a51337eb63039d52043 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Acquiring entity's valuation of investment in the leveraged lease follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-CD0AB67A-1BF2-4AE9-BB83-7FDF8E1CA1E8-low.gif) Cash Flow Present Value at 4½% Net-of-Tax Rate "1. Rentals receivable (net of principal and interest on the nonrecourse debt) ($15,564.70 at the end of each year for 8 years)" " $102,663 " "2. Estimated residual value ($200,000 realizable at the end of 9 years)" " 134,581 " "3. Future tax payments (various amounts payable over 9 years—see the table in paragraph 842-50-55-29)" " (253,489)" Net present value " $(16,245)" ##### [842-50-55-31](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:6f464e500039e00fa1af6c1678d91f38846f2fa87797dffe22f35a7c6534c124 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Acquiring entity's allocation of annual cash flow to investment and income follows (see footnote (a)). - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-E7FE62DD-2993-4EDA-9423-FA85FB059F2E-low.gif) 1 2 3 4 5 6 Annual Cash Flow Components of Income (b) Year Net Investment at Beginning of Year "Total from Col. 7 of the Table in Paragraph 842-50-55-29" Allocated to Investment Allocated to Income (a) Pretax Income Tax Effect of Pretax Income 8 " $(16,245)" " $(11,108)" " $(11,108)" - - - 9 " (5,137)" " (12,803)" " (12,803)" - - - 10 " 7,666 " " (14,649)" " (14,973)" $324 " $5,530 " " $(5,206)" 11 " 22,639 " " (16,663)" " (17,621)" 958 " 16,353 " " (15,395)" 12 " 40,260 " " (18,857)" " (20,561)" " 1,704 " " 29,087 " " (27,383)" 13 " 60,821 " " (21,248)" " (23,822)" " 2,574 " " 43,937 " " (41,363)" 14 " 84,643 " " (23,856)" " (27,439)" " 3,583 " " 61,160 " " (57,577)" 15 " 112,082 " " (26,698)" " (31,443)" " 4,745 " " 80,995 " " (76,250)" 16 " 143,525 " " 149,600 " " 143,525 " " 6,075 " " 103,698 " " (97,623)" Totals " $3,718 " " $(16,245)" " $19,963 " " $340,760 " " $(320,797)" (a) "Lease income is recognized as 4.233% of the unrecovered investment at the beginning of each year in which the net investment is positive. The rate is that rate which, if applied to the net investment in the years in which the net investment is positive, will distribute the net income (net cash flow) to those years. " (b) Each component is allocated among the years of positive net investment in proportion to the allocation of net income in column 4. Journal Entry 2 in the table in paragraph 842-50-55-33 includes an example of this computation. ##### [842-50-55-32](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:980972c1fa10e989750410817da1dd3d300d2342f7f92b065e8016c235243d54 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Illustrative journal entry for recording allocation of purchase price to net investment in the leveraged lease follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-4BC264A3-CF91-474D-AB2B-C542957B07B8-low.gif) "Rentals receivable (table in paragraph 842-50-55-29, total of column 1 minus residual value, minus totals of columns 3 and 6)" " $124,515 " Estimated residual value (paragraph 842-50-55-28) " 200,000 " "Purchase price allocation clearing account (paragraph 842-50-55-30, present value)" " 16,245 " "Unearned and deferred income (paragraph 842-50-55-30, present value, minus total of rentals receivable and estimated residual value)" " $340,760 " ##### [842-50-55-33](https://asc.understandingaccounting.org/asc/842/50/#842-50-55-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:27.334Z to 2026-09-10T01:58:27.334Z Record version: sha256:65d0eda713a52f242c13ea585edef3423f51495fb49e4de2f37461864f7a455b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Illustrative journal entries for year ending December 31, 19Y4, follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-10B02688-1D77-4318-AFC8-08357D54A1ED-low.gif) "Third Year of Operation after the Business Combination (Year 10 of the Lease)" Journal Entry 1 Cash " $15,565 " "Rentals receivable (table in paragraph 842-50-55-29, column 1 minus columns 3 and 6)" " $15,565 " Collection of year's net rental Journal Entry 2 Unearned and deferred income " $5,530 " "Income from leveraged leases (table in paragraph 842-50-55-31, column 5)" " $5,530 " Recognition of pretax income for the year allocated in the same proportion as the allocation of total income computed as follows: "(\[$324 ÷ $19,963\] × $340,760 = $5,530)" Journal Entry 3 "Deferred taxes (table in paragraph 842-50-55-29, column 5, minus table in paragraph 842-50- 55-31, column 6)" " $25,008 " "Income tax expense (table in paragraph 842-50- 55-31, column 6)" " 5,206 " "Cash (table in paragraph 842-50-55-29, column 5)" " $30,214 " To record payment of tax for the year Source downloaded (UTC): 2026-09-10T01:58:31.075Z to 2026-09-10T01:58:31.075Z Record version: sha256:305fac1c53f6557e259128613db46c23511be19fa8a476cc7a53fdc8ccd2dc86 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-S00: SEC 00 Status [Read section](https://asc.understandingaccounting.org/asc/842/50/#sec-00-status) SEC content: yes ##### [842-50-S00-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-S00-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:31.075Z to 2026-09-10T01:58:31.075Z Record version: sha256:a236ffb9a07df26b1fea09149fefbb24375e9b0edc996d2ac68fe6ad73c71ea2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
842-50-S35-1AddedAccounting Standards Update No. 2017-1309/29/2017
842-50-S99-1AddedAccounting Standards Update No. 2017-1309/29/2017
Source downloaded (UTC): 2026-09-10T01:58:34.114Z to 2026-09-10T01:58:34.114Z Record version: sha256:2e61f01ef564f17ce29e496316457618461f7ac695ca0286407adf02cc086562 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-S35: SEC 35 Subsequent Measurement [Read section](https://asc.understandingaccounting.org/asc/842/50/#sec-35-subsequent-measurement) SEC content: yes #### Effect of a Change in Tax Law or Rates on Leveraged Leases ##### [842-50-S35-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-S35-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:34.114Z to 2026-09-10T01:58:34.114Z Record version: sha256:e085841c01cec453e96cd150dac3032d84e73f810228f56089f8a659d2f85033 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See paragraph [842-50-S99-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-S99-1), SEC Observer Comment: Effect of a Change in Tax Law or Rates on Leverage Leases, for SEC Staff views on the effect of a change in tax law or rate on leveraged leases. Source downloaded (UTC): 2026-09-10T01:58:37.823Z to 2026-09-10T01:58:37.823Z Record version: sha256:d60fdb789b4ab9c804c9ecc0e0953590f2a0b23d49e6245035734a93c0d097e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 842-50-S99: SEC 99 SEC Materials [Read section](https://asc.understandingaccounting.org/asc/842/50/#sec-99-sec-materials) SEC content: yes #### SEC Staff Guidance ##### [842-50-S99-1](https://asc.understandingaccounting.org/asc/842/50/#842-50-S99-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:58:37.823Z to 2026-09-10T01:58:37.823Z Record version: sha256:b74ceca5e9fd4f2bc8a1057edf93f2271d6815bb0230418dca12c8da18abd445 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following is the text of SEC Observer Comment: Effect of a Change in Tax Law or Rates on Leveraged Leases. - Section 842-50-35 requires that all components of a leveraged lease be recalculated from inception of the lease based on the revised after-tax cash flows arising from the change in the tax law, including revised tax rates. The difference between the amounts originally recorded and the recalculated amounts must be included in income of the year in which the tax law is enacted. - This accounting may have distortive effects on the ratio of earnings to fixed charges ("the ratio") as calculated. For example, a favorable after-tax effect might consist of an unfavorable adjustment to pretax income that is more than offset by a favorable adjustment to income tax expense. In those circumstances, despite the overall favorable effect, the ratio as calculated pursuant to the applicable instructions to Item 503(d) of Regulation S-K would be affected negatively because the "earnings" component of the ratio is based on pretax income. - In filings with the Commission the SEC staff will expect the cumulative effect on pretax income and income tax expense, if material, to be reported as separate line items in the income statement. SEC staff will not object to exclusion of an unfavorable pretax adjustment from the "earnings" component of the ratio, in cases in which the after-tax effect is favorable, provided that (1) such exclusion is adequately identified and explained in connection with all disclosures and discussions relating to the ratio and (2) supplemental disclosure is made of the ratio as calculated in accordance with the applicable instructions.