Residual Value Guarantee

Explanation

For lessees, ASC 842 includes in the lease payments the amount probable of being owed under a residual value guarantee. IFRS 16 includes the amount expected to be payable. Both measure the expected shortfall, not the full guaranteed amount, and lessees remeasure when that estimate changes.

For lessors, the guaranteed residual value affects classification and measurement. Under ASC 842, a guarantee from the lessee counts toward the lease payments in the classification tests. A guarantee from a third party is also considered in the "substantially all of the fair value" test, which can result in a direct financing lease rather than an operating lease. The net investment in a sales-type or direct financing lease includes both guaranteed and unguaranteed residual values. IFRS 16 similarly includes in the lessor's lease payments residual value guarantees provided by the lessee, a party related to the lessee, or an unrelated third party that is financially capable of discharging the obligation.

Why It Matters

RVGs are common in equipment and vehicle leasing and can tip classification from operating to finance or sales-type, with very different income patterns. Lessors using SAP RAR need guaranteed and unguaranteed residuals as separate inputs to classification and schedules.

Related Terms

Net Investment in the Lease · Sales-Type Lease · Direct Financing Lease · Lease Liability · Lessor vs. Lessee

Related Articles

• Operating vs. Finance Lease: How Classification Drives Accounting