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A lessor’s evaluation and accounting for an impairment will depend on the lease classification. Sales-type and direct financing leases are financial assets, whereas the underlying asset in an operating lease is property, plant and equipment.

4.7.1 Impairment Sales-type and direct financing leases (lessor)

A lessor should assess its entire net investment in the lease for impairment and recognize any impairment loss in accordance with the loan impairment guidance in ASC 310 until ASC 326 adopted. Once ASC 326 is adopted, that guidance should be applied to the net investment in the lease. See LI 7 for guidance.
The net investment in a sales type lease consists of the sum of the following:
  • Lease receivable, which is the present value of the lease payments and the guaranteed residual value of the asset
  • Unguaranteed residual asset, which is the expected unguaranteed residual value of the asset at the end of the lease term
For direct financing leases, the net investment includes these same amounts reduced by the amount of any deferred selling profit.
Both the lease receivable and the unguaranteed residual asset must be considered when assessing the net investment in the lease for impairment.

4.7.1.1 Impairment — lease receivable

When evaluating the loss allowance for the lease receivable portion of the net investment in the lease, the lessor can only consider the lessee's right to use the asset during the lease term as collateral for the lease receivable and not the right to the residual asset. This is because in most cases, the only asset that is available to the lessee is its right to use the leased asset during the lease term. Generally, the lessee has no right over the residual asset, unless the lessee has purchase option that it is reasonably certain of being exercised or title is transferred at the end of the lease term
While not an exhaustive list, a lessor should consider the following in developing its estimate of expected credit losses related to the lease receivable:
  • The lessee's credit risk as it relates to its ability to pay the cash flows during the lease
  • The lessee's credit risk as it relates to its ability to pay lessee-provided residual value guarantees
  • The lessee's credit risk as it relates to amounts due on exercise of a purchase option reasonably certain of being exercised
  • The mitigating impact of cash flows associated with guaranteed and unguaranteed residual values of the leased asset

4.7.1.2 Impairment — unguaranteed residual asset

The amount used to assess impairment of the unguaranteed residual asset would be an assumed lump sum payment related to the expected residual value at the end of the lease term. This could be, for example, the sale of the asset at auction.

4.7.2 Impairment operating leases (lessor)

Lessors should follow the guidance in ASC 360 regarding the impairment of long-lived assets for assets subject to an operating lease. See PPE 5 for further guidance on the impairment of tangible and intangible assets.
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