What is the importance of conducting periodic residual value reviews?

• A. To set the interest rate on new financing.
• B. To adjust expected residual value and depreciation of the equipment according to market changes and customer usage.
• C. To determine tax liabilities for the lessor.
• D. To decide which customers to terminate leases with.

Answer: (B)

Residual value reviews focus on updating the end-of-lease value of the equipment and adjusting depreciation accordingly. Over time, market conditions and how the equipment is actually used can change the amount the asset can fetch at disposition. By re-estimating the residual, the lessor keeps the depreciation expense and carrying value accurate, reflects realistic recoveries in the financial statements, and informs end-of-lease decisions such as buyouts or remarketing strategies. This proactive adjustment helps manage risk and pricing for future leases, rather than influencing new financing terms, tax liabilities, or which customers to terminate.