What is Direct financing lease?
In short
A direct financing lease is a lessor's lease that meets none of the sales-type criteria, but where the present value of the lease payments plus any residual value guaranteed by third parties equals substantially all of the asset's fair value and collection is probable.
Key takeaways
- The lessor derecognizes the asset and records a net investment in the lease.
- Any selling profit is deferred and recognized over the lease term, not at commencement.
- Leases that are neither sales-type nor direct financing are operating leases.
Where it's tested
BAR: Lease Accounting — Lessor Perspective — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
What is the primary accounting difference between a sales-type lease and a direct financing lease for a lessor?