Sales-Type Lease

Explanation

Under ASC 842, a lessor classifies a lease as sales-type if any of the following criteria is met:

1. ownership transfers to the lessee by the end of the lease term,

2. the lessee has a purchase option that it is reasonably certain to exercise,

3. the lease term is for the major part of the remaining economic life of the asset,

4. the present value of lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the asset's fair value,

5. the asset is so specialized that it has no alternative use to the lessor at the end of the term.

At commencement, the lessor derecognizes the asset, recognizes a net investment in the lease, and – for manufacturers and dealers – recognizes selling profit or loss. Interest income is recognized over the lease term.

Special rules apply if collectibility of lease payments is not probable at commencement, or if variable payments would lead to a day-one loss.

Why It Matters

Sales-type leases are common for equipment manufacturers and dealers. They require present value calculations, receivable tracking, and interest schedules – typically with additional logic in SAP Revenue Accounting and Reporting (RAR).

Related Terms

ASC 842 · Finance Lease · Net Investment in the Lease · Operating Lease · Direct Financing Lease · Residual Value Guarantee · Selling Profit · Collectibility