A contract between a lessor and its assignee whereby the proceeds in excess of a specific amount received by the lessor upon the sale or re-lease of the leased asset following the expiration or earlier termination of the lease agreement are shared by the lessor with the assignee and, possibly, other third parties, is a residual sharing agreement. In many agreements, the lessor and/or assignee are permitted to recover their out-of-pocket expenses, such as the cost of refurbishing the equipment, before the sale proceeds from the disposition of a leased asset are disbursed.
Under US GAAP, unless the lessor accepts sufficient risk through a residual sharing agreement to meet the 90% fair value test for it to qualify as an operating lease for the lessee, a TRAC lease will be classified by the lessee as a capital lease for financial reporting purposes. A TRAC lease is an open-end equipment lease with a contract provision that requires the lessee’s final rental payment on a leased motor vehicle or trailer to be adjusted either upward or downward by reference to the amount realized upon sale or other disposition of the asset compared to the residual value stipulated in the contract.
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