Another good question has been raised by one of my readers, this time involving purchased leveraged leases. The question is – “If you purchase a leveraged lease, for example, in year 25 of a 30 year lease, can you still use leveraged lease accounting?” The short answer is yes, but being a good accountant (and teacher at heart), I will give you the long answer.
On a broad level, FASB 13 tells us that, once the lease is classified at inception, its classification is not revisited unless there is a new transaction. A new transaction would be the result of a renewal or extension, for instance, or if both parties to the deal agree to a revision in the terms of the agreement. Neither of these events occur when a lease is purchased. Purchased leases are addressed more specifically in paragraphs 12-16 of FIN 21, Accounting for Leases in a Business Combination. Although the purchase of a leveraged lease may not be the result of a business combination, we use the provisions of FIN 21 as guidance. Essentially, FIN 21 tells us that the purchaser retains the leveraged lease classification as of the date of the purchase. The purchase price becomes the net investment in the lease, which must be broken down into its components of net rents receivable, unguaranteed residual, and unearned income. The unearned income will be a function of the remaining cash flows.
