A direct financing lease is a financing arrangement in which the lessor acquires assets and leases them to its customers, with the intent of generating revenue from the resulting interest payments. Under this arrangement, the lessor recognizes the gross investment in the lease and the related amount of unearned income.
In simple words, direct financing lease results when a lessor owns or acquires the assets that are leased to a given lessee. In other words, the lessee did not previously own the assets that it is leasing. The lessor may be the manufacturer of the assets, financial institution or professional lessor.