When a lease has an unguaranteed residual value, the lessor reduces sales revenue and cost of goods sold by the present value of the unguaranteed residual value.
True
False
The correct answer and explanation is:
Correct Answer: ✅ True
Explanation:
In lease accounting, especially for sales-type leases under IFRS 16 or ASC 842 (depending on whether IFRS or US GAAP is being used), the treatment of residual values is important in determining how the lessor accounts for revenue and cost of goods sold (COGS).
✅ What is an Unguaranteed Residual Value?
An unguaranteed residual value is the portion of the expected value of the leased asset at the end of the lease term that is not guaranteed by the lessee or any third party. In simple terms, it’s the amount the lessor hopes to recover by selling or re-leasing the asset, but with no assurance it will be received.
💡 Sales-Type Lease and Revenue Recognition:
In a sales-type lease, the lessor effectively sells the asset to the lessee and recognizes:
- Sales revenue
- Cost of goods sold (COGS)
- A lease receivable
To reflect the fact that part of the asset’s value remains with the lessor (in the form of an unguaranteed residual value), the present value of the unguaranteed residual is excluded from both the:
- Sales revenue, and
- COGS
This adjustment ensures that the sales revenue and cost of goods sold only reflect the portion of the asset that is being “sold” to the lessee through lease payments.
📊 Example:
- Fair value of asset = $100,000
- Present value of lease payments = $80,000
- Present value of unguaranteed residual = $20,000
Then:
- Sales Revenue = $80,000
- COGS = Carrying value of asset × (80,000 / 100,000)
✅ Conclusion:
Since the lessor does not “sell” the unguaranteed residual portion, it makes accounting sense to exclude its present value from both sales revenue and COGS. Therefore, the statement is True.