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8.4 Sale of lease receivables and residual assets
Publication date: 31 Oct 2023
us Leases guide
The sale of a lease receivable (the right to receive lease payments and guaranteed residual values at lease commencement) should be accounted for under the provisions of ASC 860, Transfers and Servicing. ASC 860 does not address, however, a sale of the unguaranteed residual asset in sales-type and direct financing leases. We believe such sales, including the sale of residual values guaranteed after commencement, should be accounted for under ASC 842, which refers to the sale guidance in ASC 606 (see LG 8.4.2 for more details).
8.4.1 Accounting for the sale of a lease receivable
To account for the sale of a lease receivable, a lessor should evaluate the derecognition requirements of ASC 860 to determine whether a transfer of a lease receivable qualifies as a sale (refer to TS 3). If it does not, a lessor should follow the secured borrowing guidance in ASC 860 (refer to TS 5). If it does, ASC 842-30-35-4 provides guidance on a lessor’s accounting for the retained unguaranteed residual asset.
If a lessor sells substantially all of the lease receivable associated with a sales-type or a direct financing lease and retains an interest in the unguaranteed residual asset, the lessor shall not continue to accrete the unguaranteed residual asset to its estimated value over the remaining lease term. The lessor shall report any remaining unguaranteed residual asset thereafter at its carrying amount at the date of the sale of the lease receivable and apply Topic 360 on property, plant, and equipment to determine whether the unguaranteed residual asset is impaired.
8.4.2 Sale of residual asset in a direct financing or sales-type lease
There is no specific guidance in ASC 842 on what model to apply to the sale of a residual asset that is either unguaranteed or guaranteed after the lease commencement date. (As noted in LG 8.4, a residual asset that was guaranteed at the lease commencement date is a financial asset, accounted for under the provisions of ASC 860.) Since an unguaranteed residual is not a financial asset, ASC 860 does not apply. We believe the guidance in ASC 842-40-25-1 addressing the sale of nonfinancial assets should be applied to this type of transaction. Under that guidance, sale recognition is permitted provided the requirements in ASC 606 for a sale are met. In other words, to determine when an unguaranteed residual asset subject to a lease or a residual asset guaranteed after commencement should be derecognized, the lessor should apply the guidance in:
- ASC 606-10-25-1 through ASC 606-10-25-8 to determine the existence of a contract, and
- ASC 606-10-25-30 to determine when the entity satisfies a performance obligation by transferring control of an asset.
8.4.3 Purchase of an interest in the residual value of a leased asset
Residual assets may be guaranteed or unguaranteed. A residual asset that is guaranteed at lease commencement is considered a financial asset under ASC 860. An unguaranteed residual asset, or one that was guaranteed subsequent to lease commencement, is not a financial asset.
8.4.3.1 Purchase of an unguaranteed residual asset
ASC 842-30-40-4 refers to ASC 360 for guidance on a third-party’s acquisition of an interest in the unguaranteed residual value of an asset from the lessor. As discussed in ASC 360-10-25-4, the third party should record the interest as an asset on the date it is acquired; the interest should be initially measured using the guidance in ASC 360-10-30-3 and ASC 360-10-30-4.
An interest in the residual value of a leased asset recognized under paragraph 360-10-25-4 shall be measured initially at the amount of cash disbursed, the fair value of other consideration given, and the present value of liabilities assumed.
The fair value of the interest in the residual value of the leased asset at the date of the agreement shall be used to measure its cost if that fair value is more clearly evident than the fair value of assets surrendered, services rendered, or liabilities assumed.
ASC 360-10-35-14 provides guidance on the subsequent accounting for an interest in the unguaranteed residual value of a leased asset. It should be carried at its acquisition cost until it is sold (or otherwise disposed of). If there is an other-than-temporary decline in the value, it should be written down to fair value with a loss recognized equal to the amount of the write-down.
An entity acquiring an interest in the residual value of any leased asset, irrespective of the classification of the related lease by the lessor, shall not recognize increases to the asset’s estimated value over the remaining term of the related lease, and the asset shall be reported at no more than its acquisition cost until sale or disposition. If it is subsequently determined that the fair value of the residual value of a leased asset has declined below the carrying amount of the acquired interest and that decline is other than temporary, the asset shall be written down to fair value, and the amount of the write-down shall be recognized as a loss. That fair value becomes the asset’s new carrying amount, and the asset shall not be increased for any subsequent increase in its fair value before its sale or disposition.
8.4.3.2 Purchase of guaranteed residual asset
If the future residual value of a leased asset is guaranteed at lease commencement by either the lessee or another party, it is considered a financial asset under ASC 860. Therefore, such guaranteed residual value would be accreted to the guaranteed amount by the purchaser if the transfer of the guaranteed residual value qualifies as a sale under the derecognition requirements of ASC 860 (refer to TS 3). If it does not, a purchaser should follow the secured borrowing guidance in ASC 860 (refer to TS 5). If the residual is guaranteed after the lease commencement date, it is considered the same as an unguaranteed residual asset by the purchaser and accounted for as discussed in LG 8.4.3.1.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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