When does the lessee incorporate residual values when calculating the present value of the lease liability?...

When does the lessee incorporate residual values when calculating the present value of the lease liability? What dollar amounts should they use?

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Expert Solution

Under ASC 842, in measuring the lease liability, the lessee includes only that portion of the residual value for which payment is probable (as defined in ASC 450 Contingencies). The initial measurement guidance in ASC 842 will result in a lessee recording a finance lease liability at a lower amount than the liability it would have recognized for a capital lease under ASC 840, all other considerations being equal.

The lessee shall not recognize the unguaranteed residual value in the computation of the minimum lease payments and the capitalization of the leased asset under obligation.The lessee is not responsible for guaranteeing a residual value payment at the end of the lease, hence, unguaranteed residual value is excluded from the calculation of a minimum lease payment.

The present value of the bargain purchase option should be added to the present value of the minimum lease payments to compute the initial asset and liability value by the Lessee since this a option of purchasing the property in the future given to lessee in the lease agreement which is likely to be exercised.

ekkarill92 answered 1 month ago

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