In relation to lease/ leasing, it is the finance income that results from the difference between the gross amount and net amount invested in the lease. In other words, this represents the difference between the minimum lease payments and the present value of these payments over the term of the lease. This amount is amortized on the statement of income (SOI) as interest income, over the period of lease repayment lease.
Unearned finance income = gross investment in lease – net investment in lease
Gross investment in lease equals the total lease payments that a lessor receives over the lease term. Net investment in lease is the amount at which the lease receivables are recorded on the statement of financial position (SFP). It is calculated by discounting the gross investment in lease at the implicit rate of interest (on which the lease was priced). Gross investment in lease consists of lease payments and unguaranteed residual value.
Lease payments include fixed payments and “indexed” variable payments, in addition to adjustments for any amounts due from the lessee’s exercise of the embedded purchase option, and any penalties associated with termination option (by the lessee). Unguaranteed residual value is the residual value which is not guaranteed by any party. However, it is under a third-party guarantee (by a party related to the lessor).
Unearned finance income is known for short as UEFI.
Comments