The lessor’s gross and net investment in the lease
The lease has the same facts as described in, i.e. the asset has a fair value of €10,000, the lessee is making five annual rentals payable in advance of €2,100 and the total unguaranteed estimated residual value at the end of five years is estimated to be €1,000. The lessor’s direct costs have been excluded for simplicity.
The lessor’s gross investment in the lease is the total rents receivable of €10,500 and the unguaranteed residual value of €1,000. The gross earnings are therefore €1,500. The initial carrying value of the receivable is its fair value of €10,000, which is also the present value of the gross investment discounted at the interest rate implicit in the lease of 6.62%.
|
Year |
`Receivable |
Rental |
Finance |
Gross |
Gross |
Receivable |
|
1 |
10,000 |
2,100 |
523 |
9,400 |
977 |
8,423 |
|
2 |
8,423 |
2,100 |
419 |
7,300 |
558 |
6,742 |
|
3 |
6,742 |
2,100 |
307 |
5,200 |
251 |
4,949 |
|
4 |
4,949 |
2,100 |
189 |
3,100 |
62 |
3,038 |
|
5 |
3,038 |
2,100 |
62 |
1,000 |
1,000 |
|
|
10,500 |
1,500 |
The gross investment in the lease at any point in time comprises the aggregate of the rentals receivable in future periods and the unguaranteed residual value, e.g. at the end of year 2,, the gross investment of €7,300 is three years’ rental of €2,100 plus the unguaranteed residual of €1,000. The net investment, which is the amount at which the debtor will be recorded in the balance sheet, is €7,300 less the earnings allocated to future periods of €558 = €6,742.
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