A sales-type lease is a lessor model for a lease that meets at least one transfer criterion at commencement. The model can recognize selling profit or loss when the underlying asset is derecognized and a net investment is recorded.
Separate the sale result from financing income
At commencement, recognize the net investment in the lease and derecognize the underlying asset. The selling result compares the appropriate revenue and cost amounts under Topic 842. After commencement, use the rate implicit in the lease to recognize interest income on the net investment. Reduce the investment for cash received. Apply the relevant guidance to credit risk and changes in residual value.
For example, a manufacturer leases specialized equipment with no expected alternative use. The asset meets a transfer criterion, so the lessor uses the sales-type route. If fair value exceeds carrying amount and collectibility conditions are met, selling profit can arise at commencement. Later cash receipts are not new sales revenue; they reduce the net investment and include interest income.
Do not infer classification from the existence of profit, and do not treat a direct-financing lease as the same model. Read sales-type recognition in ASC 842-30-25-1 through 25-2 and initial measurement in ASC 842-30-30-1.
Put the concept to work
Apply this concept
- Prepare supplied sales-type commencement revenue, cost, profit or loss, initial-direct-cost treatment, net investment, interest income, receipts, entries, and residual reconciliation.
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Build on these ideas
- Lease receivable and net investment — Apply
To apply this concept: Required. Sales-type accounting begins with a measured net investment.