Guaranteed Residual Value

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LeaseAccelerator’s Lease Accounting Manager is designed to apply ASC840, IAS17, ASC842, and IFRS16 Accounting Standards. The following guidance is provided to ensure clients understand the use of the Contractual Guaranteed Residual Value (CGRV) and Estimated Guaranteed Residual Value (EGRV) including how to enter these values into the system.

Return Option Fee

Return Option Fees are the total fees required to be paid by a Lessee to return equipment or real estate to the Lessor/Landlord (excluding any Asset Retirement Obligations). Return Option Fees are typically administrative and may be called many different things, such as a re-stocking fee or a return processing fee.

Note: Contractual Guaranteed Residual Value (GRV) is considered a Return Fee within LeaseAccelerator.

Limit Fee

Typically seen in a Split TRAC lease, this is the percentage of the Total Return Fee a Lessee must pay based on a contractual agreement to split the amount due with the Lessor.

Contractual Guaranteed Residual Value (CGRV)

Contractual Guaranteed Residual Value is part of the residual value guaranteed by the Lessee and estimates, in the contract, how much the asset will be worth at the end of the lease. In other words, CGRV is the estimated Fair Market Value of the Asset at the return date. This amount is negotiated at the inception of the lease.

The table below summarizes the use of the Contractual GRV within each standard:

Accounting Standard	Used in Valuation of ROU Asset and Total Lease Liability	Used in Lease Classification Testing	Included in Contractual Obligations or Maturity Analysis Disclosure
ASC 840	Yes	Yes	Yes
ASC 842	No ⁽¹⁾	Yes	No ⁽¹⁾
IAS 17	Yes	Yes	Yes
IFRS 16	No ⁽¹⁾	N/A ⁽²⁾	No ⁽¹⁾

ASC 842 and IFRS 16 use the Estimated GRV for valuation and disclosure purposes
IFRS 16 does not include an FMV test. All leases are Finance except when Non-Cancellable = No, Short Term = Yes, Low Value = Yes)

Estimated Guaranteed Residual Value (EGRV)

Estimated GRV is the estimated payment to be made by the Lessee to the Lessor if the asset's Fair Market Value is less than the Contractual GRV. The EGRV is the amount estimated to be paid and is the difference between the original CGRV and the actual FMV of the asset at the end of the lease. Since this is an estimate of a liability contingent upon the asset's value at the return date, LeaseAccelerator believes that accounting guidance for contingent liabilities would be applied before entering any amount as an EGRV. Clients, however, should confer with their accounting advisors.

How to Enter a Contractual GRV (CGRV)

Entering Contractual GRV through the PIW is currently not supported.

To enter a Contractual GRV through the User Interface, the Return Option Fee amount and the Limit Fee amount (Fixed Amount or Percent of Amount Financed) must be entered, and they must be the same.

Alternatively, the Contractual GRV may be entered by recording an amount in the Return Option and checking the "Reduce by Sales Proceeds" checkbox.

Note: Amounts that a Lessee is contractually obligated to pay to return the asset, such as dismantling, disconnection costs, refurbishment, or costs to return the asset to its original condition, are not Return Option Fees. These should be entered via the Other Related Expense feature, selecting the ARO-End of Life Expense Type and the appropriate Sub-Type.

How to Enter an Estimated GRV (EGRV)

To enter an EGRV using the PIW, users enter the amount on the Schedule Tab in the Estimated GRV field.

To enter the EGRV using the User Interface, users enter the amount in the specified field in the Book Deal workspace.

Example

A vehicle lease is established, which stipulates that the vehicle will have a residual value (or FMV) of $3,000 when the Lessee returns the vehicle at the end of the lease term. This residual value is stated as the Lessee's responsibility. The Lessee assesses their use of vehicles and determines that they typically have excess wear and tear on their leased vehicles and, despite the negotiated Residual Guarantee in the lease contract, believes that the vehicle's Fair Market Value at the Return Date will only be $2,800.

Contractual GRV at the inception of the lease = $3,000

EGRV = 200 ($3,000 - $2,800 = $200)

Note: if the Lessee believes the vehicle will have the required FMV to meet the CGRV obligation, then the EGRV = $0.

Entering Contractual GRV in the UI – Method 1

Step	Action
1	Select the Mid-Term/EOT Options button in the Enter Schedule workspace on the Terms tile.
2	Select End of Term from the first Type drop-down.
3	Select Return from the second Type drop-down.
4	Select the Return Option method (Fixed $ or %) and enter the corresponding nominal amount or % of the Contractual GRV. Note: Entering the Return Option method will open the Limit Fee fields for input.
5	Check the Limit Fee selector box.
6	Enter the Limit Fee Option method (this must be the same as the Return Option Fee method).
7	Enter the corresponding Limit Fee Amount equal to the Return Fee Amount.
8	Limit Fee Amount = Return Fee Amount = Contractual GRV Amount.

Entering Contractual GRV in the UI – Method 2

Step	Action
1	Select the Mid-Term/EOT Options button in the Enter Schedule workspace on the Terms tile.
2	Select End of Term from the first Type drop-down.
3	Select Return from the second Type drop-down.
4	Select a Return Option method, Percent of Amount Financed or Fixed Amount, and enter the corresponding amount or percentage of the Contractual GRV. Note: Entering the Return Option method will open the Reduce by Sale Proceeds box for input.
5	Return Fee Amount = Contractual GRV Amount.
6	Check the Reduce by Sales Proceeds box.
7	Check the Limit Fee box. Enter the corresponding Limit Fee Amount equal to the Return Fee Amount.
8	Limit Fee Amount = Return Fee Amount = Contractual GRV Amount.

At this time, Contractual GRV cannot be entered using a PIW.

Entering Contractual GRV in a PIW

Step	Action
1	Select End of Term from the Timing drop-down on the EOT Options tab.
2	Select Return from the Option Type drop-down.
3	Enter Contractual GRV Amount in the Return Fee field.
4	Enter the same Contractual GRV Amount in the Limit Fee field.
5	Contractual GRV must be entered in both fields to accurately record the amount and have visibility in the UI for future review and editing. Note: Journal entries will only be generated if the Option Type is Return and the option is Reasonably Certain.

Entering Estimated GRV in the UI

Step	Action
1	Enter schedule details as usual in the Enter Schedule workspace.
2	Enter the EGRV in the Estimated Guaranteed Residual Value (GRV) field in the Book Deal workspace.
3	Book the deal.
4	In the case of a Modification, the EGRV is entered in the Modify Deal workspace on the Summary tile.

Entering Estimated GRV in a PIW

Step	Action
1	In a PIW, on the Schedule tab, enter the amount in the Estimated GRV field.
2	On the EOT Options tab, ensure the Option Type field is set to Return for this schedule.
3	Ensure the Reasonably Certain EOT Option field is marked Yes for this schedule.
4	Note: Journal entries will only be generated if the Option Type is Return and it is Reasonably Certain.