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The Effect of the Residual Value on the Lease Liability | Lessee | IFRS 16 [Video]

The Effect of the Residual Value on the Lease Liability | Lessee | IFRS 16

The residual value only affects the calculation of the lease liability when:
a) the lease contains a guaranteed residual value and
b) the lessee’s expected residual value is lower than the guaranteed residual value

This makes sense; if the lessee has guaranteed that the residual value will be $10,000 but believes the residual value will only be $6,000 then the lessee should anticipate a cash payment of $4,000 (to cover the difference). This shortfall is considered a final lease payment, so it is
discounted to its present value and included in the lease liability.

If the lessee expects the residual value to be higher than the guaranteed residual value, then the lessee doesn’t anticipate making a payment. In that case, the residual value has no effect on the lease liability. If the lessee has not made any guarantees at all concerning the residual value, then the lessee isn’t responsible for declines in the residual value and there is no effect on the lease liability.
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