Lease Accounting — Lessor Perspective

Lessor classification

1. Sales-type: any of 5 criteria (ownership, reasonably certain purchase option, ~75% of life, ~90% of fair value incl. lessee-guaranteed residual, no alternative use).
2. Direct financing: none of the 5, but present value incl. third-party guaranteed residual ≥ ~90% and collection probable.
3. Operating: everything else.

Sales-type

Derecognize asset · net investment = present value of lease payments + present value of unguaranteed residual · selling profit at commencement · interest income afterward.

Direct financing

Net investment; selling profit deferred into interest; losses immediate.

Operating

Keep and depreciate the asset · straight-line lease income · defer initial direct costs.

Other

• Variable payments (not index-based) excluded; would-be day-one loss → operating lease.
• Net investment subject to current expected credit loss (CECL) model.

Exam traps

• Operating lease: the lessor recognizes income straight-line even when payments escalate, and records no lease receivable.
• Sales-type lease where collection isn't probable: keep the asset on the books and record payments as a deposit liability until the criteria are met.
• Incentives paid by the lessor reduce the lease payments, and so the lease income.