This video shows how the lessor should account for a direct financing lease. Lessors typically account for a lease as an operating lease or as a sales-type lease, with the difference being that the risks of ownership are transferred from the lessor to the lessee with a sales-type lease (and thus it is treated as similar to a sale). However, there is a third classification: the direct financing lease. A lessor must classify a lease as direct financing when an unrelated third party guarantees the residual value. The guaranteed residual value by a third party means the lessor has not completely transferred all the risks (it now bears credit risk). Thus, the lessor accounts for the lease similar to the sales-type lease but with an importance difference: it initially defers the gross profit. This deferred gross profit is recognized as actual gross profit gradually over the term of the lease.