BLM11005 - Lease accounting: lease classification: introduction to detail

As mentioned in BLM00035, FRS 102 classifies leases as one of two kinds: finance leases and operating leases. The same classification also applies to lessors using IFRS 16.

These distinctions are also important for tax purposes.

The way in which leases are classified and accounted for is dependent on which party holds substantially all the risks and rewards of ownership of the asset. There are a number of key concepts that need to be considered when looking at the classification of a lease including

• the minimum lease payments - BLM11010
• the term of the lease -BLM11015
• fair value - BLM11020
• residual values and guarantees - BLM11025

As mentioned in BLM00035, IFRS 16 removed the distinction between finance leases and operating leases and introduced a single lessee accounting model for all but exempt leases. Once it has been determined that a contract contains a lease (see BLM00025) all leases are accounted for in the same way.