# Sales-type Lease

From the perspective of a lessor, a sales-type lease is a finance lease in which the fair market value (or if lower, the PV of lease payments) of the underlying asset is not equal to its cost thereby resulting in a selling profit or loss.

At the commencement date, a lessor records a sales-type lease at its net investment in lease which equals the present value of lease payments determined at the implicit interest rate, and the unguaranteed residual value. If the fair value of the underlying assets exceeds the carrying amount (net of any residual value), it is recorded as selling profit or loss.

Selling profit = PV of lease receivable - Carrying amount net of unguaranteed residual value

The interest income is recognized over the lease term such that it results in a constant periodic rate of return.

Sales-type lease is relevant only to lessors. Lessees term such leases as finance leases. It can be contrasted by the direct financing lease in which there is no operating profit recognized at the commencement of the lease.

## Example

Company STL is a manufacturer of air conditioners. Each unit has a cost of $400 and the company leases them over a term of 3 years for quarterly lease payments of$50. The present value of lease payments is 513 at implicit interest rate of 10%.

Since the present value of lease payments i.e. the lease receivable is more than the carrying amount of the leased asset, the lessor should record an operating income of $113 (equal to the difference between the lease receivable and the carrying amount). In addition to this one time profit at the inception of the lease, the lessor shall record periodic interest income. For example, in the first quarter it earns an interest of$12.82 each quarter ($513 × 10% ÷ 4).  Lease receivable$513 Cost of sales $400 Property, plant, and equipment$400 Revenue \$513