Lessor lease classification

Lessor lease classification routes a lease to the sales-type, direct-financing, or operating model. A lessor applies its own criteria and evidence; its result is not a mechanical mirror of the lessee's classification.

Route the three models

Apply the five transfer criteria used for sales-type classification. If one is met, the lessor generally uses the sales-type model. If none is met, compare the present value of lease payments and relevant residual guarantees with fair value. Also determine whether collection is probable. Satisfying both tests supports direct-financing classification. Otherwise, the lease is operating. A special rule can require operating classification when certain variable payments would cause a commencement selling loss.

For example, a specialized asset with no expected alternative use can produce a sales-type lease even without ownership transfer. Another lease can fail all transfer criteria but qualify as direct financing because the payment and residual economics recover substantially all fair value and collection is probable. A third remains operating.

Classification determines derecognition, net-investment recognition, profit timing, and initial-direct-cost treatment. Read ASC 842-10-25-2 through 25-3 and the variable-payment exception in ASC 842-10-25-3A.