Residual Value Guarantees
Related terms
Category
IFRS 16
A residual value guarantee is a guarantee made by a lessee to a lessor that the underlying asset will be worth at least a specified amount at the end of the lease. Under ASC 842, amounts probable of being owed under residual value guarantees are included in lease payments for liability measurement.
Why it matters
Residual value guarantees create additional risk for lessees. if the asset's value falls below the guaranteed amount, the lessee must pay the difference. This expected shortfall must be estimated and included in lease payments, increasing the lease liability. The estimate requires judgment about future asset values.
How Arvexi handles this
Arvexi extracts residual value guarantee provisions from lease documents. The platform includes the estimated amount probable of being owed in lease liability calculations and flags these leases for periodic reassessment of the expected shortfall.