Direct Financing Lease

Method used by lessors in capital leases when both of the following criteria for the lessor are satisfied: (1) collectibility of minimum lease payments is assured and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. In a direct financing lease, the lessor is not a manufacturer or dealer in the item; the lessor purchases the property only for the purpose of leasing it.

Method used by lessors in capital leases when both of the following criteria for the lessor are satisfied: (1) collectibility of minimum lease payments is assured and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred. In a direct financing lease, the lessor is not a manufacturer or dealer in the item; the lessor purchases the property only for the purpose of leasing it. The lessor uses the interest rate implicit in the lease to discount the future payments from the lessee. The difference between the gross investment in the lease and the cost of the leased property is reported as unearned interest income. Unearned interest income is then amortized using the interest method thus resulting in interest income over the life of the lease. Initial direct costs of the lease are expensed. See also Sales-Type Lease.