Residual value guarantee
A guarantee made to the lessor, by a party unrelated to the lessor, that the value of the underlying asset at the end of the lease will be at least a specified amount.
Definition
A residual value guarantee is a guarantee made to a lessor, by a party unrelated to the lessor, that the value (or part of the value) of the underlying asset at the end of the lease will be at least a specified amount. The party giving it may be the lessee, a party related to the lessee, or an unrelated third party. Only the amounts expected to be payable by the lessee under residual value guarantees are included in the lease payments used to measure the lease liability, not the guaranteed value as a whole and not amounts a third party is expected to pay. The liability is remeasured if the amount expected to be payable under the guarantee changes.
Why it matters
A residual value guarantee given by the lessee increases the lease liability by the present value of the amount it expects to pay under it. Residual value guarantees are more common in vehicle and equipment leases than in property leases.
In AuditLease
AuditLease supports residual value guarantees as an optional input in the lease payment schedule. At the normal end of the term it takes the contractual guarantee amount; where the term ends at a reasonably certain break, the preparer records whether the guarantee lapses or is expected at a different amount.
Related terms
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This definition is for general information only and is not accounting or legal advice. Definitions are based on IFRS 16, FRS 102, and associated guidance published by the IFRS Foundation and the Financial Reporting Council. Users should refer to the applicable accounting standards and their professional advisers for judgement-specific matters.