Net Investments in Operating Leases

12 Months Ended

Dec. 31, 2024

Net investment in operating leases consists primarily of lease contracts for vehicles with individuals, daily rental companies, and fleet customers with terms of 60 months or less. Payment extensions may be requested by the customer and are generally limited to a maximum of six months over the term of the lease. Term extensions may also be requested by the customer. Term and payment extensions in total generally do not exceed twelve months. A lease can be terminated at any time by satisfying the obligations under the lease agreement. Early termination programs may be occasionally offered to eligible lessees. At the end of the lease, the customer returns the vehicle to the dealer or may have the option to buy the leased vehicle. In the case of a contract default and repossession, the customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses. Included in Net investment in operating leases are net investment in operating leases that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. See Note 6 for additional information.

Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease. The accrual of revenue on operating leases is discontinued at the time an account is determined to be uncollectible.

We receive interest supplements and residual support payments on certain leasing transactions under agreements with Ford. We recognize these upfront collections from Ford and other vehicle acquisition costs as part of Net investment in operating leases, which are amortized to Depreciation on vehicles subject to operating leases over the term of the lease contract. Unearned interest supplements and residual support included in Net investment in operating leases at December 31, 2023 and 2024 was $1.3 billion and $1.9 billion, respectively. Earned interest supplements and residual support costs included in Depreciation on vehicles subject to operating leases for the years ended December 31, 2022, 2023, and 2024 was $1.2 billion, $0.9 billion, and $1.0 billion, respectively. Interest supplements and residual support cash received totaled $0.7 billion, $1.1 billion, and $1.6 billion for the years ended December 31, 2022, 2023, and 2024, respectively. Interest supplements due from Ford included in Notes and accounts receivable from affiliated companies totaled $46 million, $110 million, and $152 million for the years ended December 31, 2022, 2023, and 2024, respectively, and is a non-cash investing transaction in our consolidated statement of cash flows.

At the time of purchase, we establish the expected residual value for each vehicle, considering recent auction values, return volumes for our leased vehicles, industrywide used vehicle prices, marketing incentive plans, and vehicle quality data, and benchmark to third-party data depending on availability. Depreciation expense for vehicles under operating leases is then recognized on a straight-line basis, with the associated accumulated depreciation reducing the vehicle's value to its estimated residual value by the end of the scheduled lease term. Our depreciation for leased vehicles is evaluated regularly, using third-party data, and considering factors such as projected residual values at lease termination (including residual value support payments from Ford), the estimated number of vehicles that will be returned to us, and historical early termination rates due to customer defaults. Depreciation expense adjustments, reflecting revised residual value estimates, are applied prospectively on a straight-line basis. We monitor residual values monthly and review accumulated depreciation accuracy quarterly. Our policy is to promptly sell off-lease vehicles. When a vehicle is sold, the difference between net book value and proceeds, plus any lease termination fees (for example, variable lease payments such as excess wear and tear or mileage charges), are recorded as adjustments to Depreciation on vehicles subject to operating leases.

We evaluate the carrying value of held-and-used long-lived asset groups (such as vehicles subject to operating leases) for potential impairment when we determine a triggering event has occurred. When a triggering event occurs, a test for recoverability is performed by comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured in accordance with the fair value measurement framework. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. For the periods presented, we have not recorded any impairment charges.

NOTE 5. NET INVESTMENT IN OPERATING LEASES (Continued)

Net investment in operating leases at December 31 was as follows (in millions):


	2023		2024
Vehicles, at cost (a)	$	24,182	$	25,424
Accumulated depreciation	(3,850)		(3,735)
Net investment in operating leases	$	20,332	$	21,689

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(a)Includes vehicle acquisition costs less interest supplements and residual support payments we receive on certain leasing transactions under agreements with Ford and affiliated companies, and deferral method investment tax credits.

The amounts contractually due on our operating leases at December 31, 2024 were as follows (in millions):


	2025		2026		2027		2028		2029		Total
Operating lease payments	$	3,774	$	2,594	$	1,181	$	243	$	14	$	7,806

Operating leases are generally pre-payable without penalty which may result in actual amounts paid to differ from amounts contractually due.

We have a sale-leaseback agreement with Ford primarily for vehicles that Ford leases to employees of Ford and its subsidiaries. The financing we provide under this agreement is reflected on our balance sheets in Total finance receivables, net. The revenue related to these agreements is reflected in Other financing.