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8.5 Sales of equipment with guaranteed minimum resale amount
Publication date: 31 Oct 2023
us Leases guide
ASC 842-30-55-2 through ASC 842-30-55-4 address the accounting for sales incentive programs in which the manufacturer contractually guarantees that the purchaser will receive a minimum resale amount at the time the equipment is disposed of (contingent on certain requirements).
The manufacturer provides the guarantee by agreeing to do either of the following:
a. Reacquire the equipment at a guaranteed price at specified time periods as a means to facilitate its resale
b. Pay the purchaser for the deficiency, if any, between the sales proceeds received for the equipment and the guaranteed minimum resale value.
There may be dealer involvement in these types of transactions, but the minimum resale guarantee is the responsibility of the manufacturer.
A sales incentive program in which an entity (for example, a manufacturer) contractually guarantees that it has either a right or an obligation to reacquire the equipment at a guaranteed price (or prices) at a specified time (or specified time periods) as a means to facilitate its resale should be evaluated in accordance with the guidance on satisfaction of performance obligations in paragraph 606-10-25-30 and the guidance on repurchase agreements in paragraphs 606-10-55-66 through 55-78. If that evaluation results in a lease, the manufacturer should account for the transaction as a lease using the principles of lease accounting in Subtopic 842-10 and in this Subtopic.
A sales incentive program in which an entity (for example, a manufacturer) contractually guarantees that it will pay a purchaser for the deficiency, if any, between the sales proceeds received for the equipment and the guaranteed minimum resale value should be accounted for in accordance with Topic 460 on guarantees and Topic 606 on revenue from contracts with customers.
If the transaction is not accounted for as a sale, the manufacturer-guarantor continues to recognize the asset. ASC 460, Guarantees, would not be applicable because that guidance does not apply to a guarantee on a guarantor’s own asset.
8.5.1 Sale of asset with guaranteed residual under an operating lease
ASC 842-30-55-6 through ASC 842-30-55-9 describe the accounting for the sale of equipment with a guaranteed minimum resale amount subject to an operating lease.
If the transaction qualifies as an operating lease, the net proceeds upon the equipment’s initial transfer should be recorded as a liability in the manufacturer’s balance sheet.
The liability is then subsequently reduced on a pro rata basis over the period to the first exercise date of the guarantee to the amount of the guaranteed residual value at that date with corresponding credits to revenue in the manufacturer’s income statement. Any further reduction in the guaranteed residual value resulting from the purchaser’s decision to continue to use the equipment should be recognized in a similar manner.
The equipment should be included in the manufacturer’s balance sheet and depreciated following the manufacturer’s normal depreciation policy.
The Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 on property, plant, and equipment provide guidance on the accounting for any potential impairment of the equipment.
If the customer elects to sell the equipment to a third party, the recorded liability should be reduced by the amount, if any, paid by the manufacturer to the customer. With the sale of the asset, the manufacturer has no remaining obligation to the customer. Therefore, the manufacturer should remove any remaining liability, derecognize the equipment from its balance sheet, and recognize any resulting gain or loss in net income in the period of the sale.
If the customer chooses to sell the equipment back to the manufacturer, the recorded liability should be derecognized. If there is a difference between the recorded liability and the amount paid to the customer, the difference should be recognized as a gain or loss in the period of the sale. The manufacturer should not adjust the carrying value of the asset.
8.5.2 Evaluating residual value guarantees as potential derivatives
Residual value guarantees that are subject to the accounting guidance in ASC 842 are not in the scope of the guidance in ASC 815, Derivatives and Hedging. This applies to residual value guarantees that are required to be used by the lessee or the lessor to classify the lease. Residual value guarantees not used to classify the lease must be evaluated under ASC 815. This could include, for example, a residual value guarantee that the lessor obtained from a third party subsequent to lease commencement. Accounting by the third-party guarantor is also not subject to the guidance in ASC 842; the third-party guarantor should consider other accounting guidance.
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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