What is the definition of asset residual value risk in leasing?

• A. It is the risk that the asset's residual value at lease end will be lower than anticipated, affecting depreciation planning.
• B. It is the risk that the lessee may default.
• C. It refers to the risk of property taxes.
• D. It refers to the risk of interest rate changes.

Answer: (A)

Residual value risk is the possibility that the asset’s expected salvage or resale value at the end of the lease turns out to be lower than planned. When a lease is set up, the expected end-of-term value helps determine how much of the asset’s cost the lessor intends to recover through lease payments and how depreciation or impairment is handled on disposition. If the actual end value is lower, the lessor may recover less than anticipated, reducing profitability and potentially requiring write-downs when the asset is sold. This risk is about what the asset will be worth when the lease ends, not about whether the lessee makes payments, property taxes, or changes in interest rates.