NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consist primarily of lease contracts for vehicles with retail customers, daily rental companies, and fleet customers with terms of 60 months or less.

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. The amount of unearned interest supplements and residual support included in Net investment in operating leases at December 31, 2017 and 2018 was $2.8 billion and $3.3 billion, respectively. The amount of earned interest supplements and residual support costs included in Depreciation on vehicles subject to operating lease for the years ended December 31, 2016, 2017, and 2018 was $1.9 billion, $2.1 billion, and $2.4 billion, respectively. The amount of interest supplements and residual support cash received totaled $2.0 billion, $2.4 billion, and $2.8 billion for the years ended December 31, 2016, 2017, and 2018, respectively.

Depreciation expense on vehicles subject to operating leases is recognized on a straight-line basis in an amount necessary to reduce the leased vehicle value to its estimated residual value at the end of the lease term. Our policy is to promptly sell returned off-lease vehicles. We evaluate our depreciation for leased vehicles on a regular basis taking into consideration various assumptions, such as expected residual values at lease termination (including residual value support payments from Ford) and the estimated number of vehicles that will be returned to us. Adjustments to depreciation expense reflecting revised estimates of expected residual values at the end of the lease terms are recorded prospectively on a straight-line basis. Upon disposition of the vehicle, the difference between net book value and actual proceeds is recorded as an adjustment 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.

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



	2017			2018
Vehicles, at cost (a)	$	32,659		$	33,593
Accumulated depreciation	(5,927		)	(6,066		)
Net investment in operating leases before allowance for credit losses	26,732			27,527
Allowance for credit losses	(71		)	(78		)
Net investment in operating leases	$	26,661		$	27,449

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(a)	Includes interest supplements and residual support payments we receive on certain leasing transactions under agreements with Ford and affiliated companies, and other vehicle acquisition costs.

At December 31, 2017 and 2018, net investment in operating leases before allowance for credit losses includes $11.5 billion and $16.3 billion, respectively, of net investment in operating leases that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net investments in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 7 for additional information).

NOTE 5. NET INVESTMENT IN OPERATING LEASES (Continued)

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 sheet in Finance receivables, net. The revenue related to these agreements is reflected in Other financing revenue. Prior to January 1, 2017, this activity was reflected on our income statement in Operating leases revenue and Depreciation on vehicles subject to operating leases. For the year ended December 31, 2016, the operating lease revenue related to these vehicles was $302 million, while the depreciation expense related to these vehicles was $275 million.

The amounts contractually due for minimum rentals on operating leases at December 31, 2018 were as follows (in millions):



	2019		2020		2021		2022		2023
Minimum rentals on operating leases	$	4,708	$	2,929	$	1,083	$	83	$	6

Our operating leases are generally pre-payable without penalty and may cause actual amounts due to differ from amounts contractually due.