[Get it done]

None of my questions are going through to Becker on F6 for some reason, so I’ll ask this here. For lease classifications for a lessor, one of the criteria for determining if it is a sales-type lease is whether the NPV of the payments and residual value exceed the FMV of the asset. If none of the criteria are met for sales-type, there are two additional criteria to decide between direct-financing or operating, and one of those is also whether the NPV of payments and residual value exceeds the FMV of the asset. Can somebody please explain the difference between these two? I know there is one, I am just not seeing it.

[Hopefulcpa1234]

Hi all, could someone please answer the above question? I am having the same question as Get it Done. Thank you!

[AndreA]

I’m not sure if I’m answering what you asked. For direct-financing lease the NPV of the payments and third party guaranteed residual value should exceed FMV of the asset.

[Hopefulcpa1234]

Thank you for answering, I guess what confuses me is if that is the case wouldn't it meet the criteria that the NPV of the payments would equal 90% or more than the FMV of the asset, thus making it a sales-type lease?

[AndreA]

Now I see what are you asking. No, because of the NPV of the payments and third party guaranteed residual value should exceed FMV of the asset, so if you would subtract a third party guaranteed residual value it's going to be less than 90% and non of the 5 criteria are met and you will classified it as an operating lease. In the example of Sales-type lease you have the NPV of the payments and residual value (that is not guaranteed by third party) should exceed FMV of the asset.

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