Lease residual value is the expected value of the underlying asset at the end of the lease term. A guarantee can shift some residual risk to a lessee or third party, but guaranteed and unguaranteed residual interests remain distinct inputs.
Identify who bears the ending-value risk
For lessee measurement, include only the amount probable of being owed under the lessee's residual value guarantee. A lessor can include guaranteed residual value in its lease receivable or classification test. Unguaranteed residual value is a separate asset right in net investment for sales-type and direct-financing leases. Evidence should name the guarantor, cap, settlement formula, asset condition assumptions, valuation date, and owner of the estimate.
Suppose an asset is expected to be worth $20,000 at lease end. A lessee guarantees only a $15,000 floor, and the lessor retains the remaining upside and downside within the contract terms. The guarantee and the unguaranteed residual cannot be merged into one unexplained $20,000 amount. Each affects classification or measurement according to its role.
A return-condition obligation for damage can follow different guidance from a residual guarantee. Read the payment treatment in ASC 842-10-30-5 and lessor measurement in ASC 842-30-30-1.
Put the concept to work
Analyze this concept
- Separate lessee guarantees, unrelated third-party guarantees, and unguaranteed residual value and trace each supplied amount through classification, receivable, residual asset, and disclosure.
Learning resources
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Build on these ideas
- Lease payments — Analyze
To analyze this concept: Required. Residual guarantees can enter the payment population differently by role.