How should residual values be accounted by a lessor?

How should residual values be accounted by a lessor?

• A. Review residual values annually; if decline is permanent, revise value and loss in the current period; residual values are never adjusted up.
• B. Residual values are adjusted upward when market improves.
• C. Residual values are never adjusted, even if there are past losses.
• D. Residual values are written off at lease termination.

Answer: (A)

Residual values are used to determine the lessor’s expected recoveries from the lease and must be monitored regularly because changes in market conditions can affect the end-of-lease value. If evidence shows the residual value has declined permanently, you should write the asset value down and record a loss in the current period. This reflects that some of the anticipated future cash inflows are no longer recoverable. Upward revisions to residual values aren’t recognized as gains. You don’t adjust residual values up to reflect market improvements; instead, gains would only be realized when the asset is disposed of or through actual proceeds, keeping the accounting conservatively aligned with what is truly recoverable. So, residual values are reviewed annually, downward revisions trigger a current-period loss, and upward revisions are not adjusted upward.

Residual values are used to determine the lessor’s expected recoveries from the lease and must be monitored regularly because changes in market conditions can affect the end-of-lease value. If evidence shows the residual value has declined permanently, you should write the asset value down and record a loss in the current period. This reflects that some of the anticipated future cash inflows are no longer recoverable.

Upward revisions to residual values aren’t recognized as gains. You don’t adjust residual values up to reflect market improvements; instead, gains would only be realized when the asset is disposed of or through actual proceeds, keeping the accounting conservatively aligned with what is truly recoverable.

So, residual values are reviewed annually, downward revisions trigger a current-period loss, and upward revisions are not adjusted upward.