What does direct financing lease mean on the CPA exam?
Direct financing lease. A lessor lease where control transfers only because a third-party guarantee makes collection probable. Any selling profit is deferred rather than recognized at commencement.
Defined against ASC 842-10-25-3.
Which CPA exam sections use direct financing lease?
Direct financing lease appears in the BAR section of the CPA exam.
What is the difference between direct financing lease and sales-type lease?
Both are lessor finance leases. A sales-type lease meets one of the five classification criteria in ASC 842-10-25-2, and its selling profit is recognized immediately. A direct financing lease meets neither, qualifying instead under 842-10-25-3(b), and its selling profit is DEFERRED into the net investment. The usual decider is who guaranteed the residual: a lessee guarantee counts toward both tests, a third-party guarantee only toward direct financing. A selling loss is immediate under either one. (ASC 842)
Other terms defined against ASC 842-10
- finance lease: A lessee lease that meets one of five transfer-of-control tests.
- lease term: The non-cancellable period, plus any option period the lessee is reasonably certain to take, plus any period controlled by the lessor.
- sales-type lease: A lessor lease that transfers control of the asset, so the lessor derecognizes it and records selling profit at commencement.
Related terms
- operating lease: A lease that does not transfer control.
- service organization: A third party whose processing affects a user entity's financial reporting, such as a payroll bureau or a claims processor.
- carryover basis: Basis that follows the property from the previous owner instead of resetting to what was paid.
- recognized gain: The part of realized gain that actually goes on the return this year.
- lease liability: The lessee's obligation to make the remaining lease payments, measured at their present value.
- like-kind exchange: A swap of real property held for business or investment, where gain is deferred rather than recognized.