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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Lessor Classification

There are four possible classifications that apply to a lease from the standpoint of the lessor.

  1. Operating

  2. Sales‐type

  3. Direct financing

  4. Leveraged

The conditions surrounding the origination of the lease determine its classification by the lessor. If the lease meets any one of the four criteria specified above for lessees and both of the qualifications set forth below, the lease is classified as either a sales‐type lease, direct financing lease, or leveraged lease depending upon the conditions present at the inception of the lease.

  1. Collectibility of the minimum lease payments is reasonably predictable

  2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease

If a lease transaction does not meet the criteria for classification as a sales‐type lease, a direct financing lease, or a leveraged lease as specified above, it is classified by the lessor as an operating lease. The classification testing is performed prior to considering the proper accounting treatment.

It is a common practice in equipment leasing transactions for the lessor to obtain, from an unrelated third party, a full or partial guarantee of the residual value of a portfolio of leased assets. These transactions are structured in such a manner that the third‐party guarantor provides a guarantee of the aggregate residual value of the portfolio but does not individually guarantee the residual value of any of the individually leased assets included ...

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