An assessment of lessor accounting for residual values

Recently, the accounting literature has noted that the estimation of the residual value of leased assets plays an important role in the determination of the lessor's income. An analytical model of the lessor's economic profit is developed. The model is used to examine the impact that changes in economic factors have on the booked residual value. The validity of the model is tested using data on booked residual value. Further, the relationship between booked residual value and realized residual value is examined. The results of the analytical model indicate there is a tendency of management to increase the residual value in order to maintain a lessor's profit. The empirical evidence reveals that the average residual values booked as a percent of original equipment cost has increased over the past decade and residual values booked before the Tax Reform Act of 1986 were significantly smaller than booked after the tax law change.