leasing company) can account for a lease in three ways:1. Operating lease
2. Direct-financing lease
3. Sales-type lease
4. Lease capitalization, which includes the direct-financing lease and the sales-type lease, needs to be recognized when a lease meets any one of the four criteria specified for capitalization of leases and both of the following revenues-recognition criteria:
- Collection of the monthly lease payments is reasonably predictable.
- Lessor's performance is substantially complete, or future costs are reasonably predictable.
- If the lease is accounted for as a capital lease, the lessor must determine if it classifies as a direct-finance lease or as a sales-type lease.
- To classify as a sales-type lease, the fair value of the asset must be greater than the lessor's book value.
- If not, it is accounted for as a direct-financing lease.
Direct-Financing Lease
As its name implies, a direct-financing lease is basically the coupling of a sale and financing transaction. In this case, the lessor removes the leased asset from its books and replaces it with a receivable from the lessee.The only income recognized by the lessor is the interest received. The implied rate is taken by calculating IRR of the asset; cash inflow is equal to lease payments and cash outflow is equal to the book value of the lease asset.
Sales-Type Lease
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