A lessor's lease receivable is the present value of lease payments plus any guaranteed residual value that belongs in the receivable. Net investment in a sales-type or direct-financing lease also reflects the unguaranteed residual asset and, when applicable, deferred selling profit. The two balances are therefore not always equal.
Build the bridge
Start with dated lease payments and the rate implicit in the lease. Add the present value of relevant guaranteed residual value to form the lease receivable. Add the present value of the unguaranteed residual asset. For a direct-financing lease, subtract selling profit that is deferred at commencement. The resulting net investment earns interest income over the lease term so that it grows toward the cash and residual amounts expected.
Suppose the present value of payments and a guaranteed residual is $90,000, while the present value of an unguaranteed residual is $8,000. Before any deferred profit adjustment, net investment is $98,000 even though the lease receivable is $90,000. Combining the balances would erase a residual right the lessor still owns.
Collectibility and credit-loss accounting require separate evidence. Read sales-type initial measurement in ASC 842-30-30-1 and direct-financing measurement in ASC 842-30-30-2.
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Apply this concept
- Build and reconcile a supplied lessor bridge among lease receivable, guaranteed and unguaranteed residual amounts, deferred selling profit, net investment, interest income, receipts, and ending residual.
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Build on these ideas
- Lease discount rate — Apply
To apply this concept: Required. The receivable and residual asset are measured with role-appropriate period rates.
- Lessor lease classification — Analyze
To apply this concept: Required. Classification determines whether and how net investment is recognized.
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- Direct-financing lease — Apply
Required level here: apply. Required. Direct-financing accounting explicitly nets deferred profit within the investment.
- Sales-type lease — Apply
Required level here: apply. Required. Sales-type accounting begins with a measured net investment.