BLM11010 - Lease accounting: lease classification: minimum lease payments
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
This section is applicable to entities applying FRS 102 (pre 2024 amendments) or FRS 105.
See BLM17000 for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments)
The minimum lease payments are defined in the FRS 102 (pre 2024 amendments) and FRS 105 Glossary as ‘the payments over the lease term [BLM11015] that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid and reimbursed to the lessor, together with:
(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or
(b) for a lessor, any residual value guaranteed to the lessor by (i) the lessee; (ii) a party related to the lessee; or (iii) a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee’.
Note that leases are classified at inception (BLM11030) and that only rarely is it appropriate to reclassify a lease after inception. Therefore, it is possible for a lessor to enter into an operating lease and, at a later date, obtain a guarantee for the residual value. However, the lessor had to take a residual value risk in the interim, and, if the market has moved adversely, may not be able to guarantee the asset’s original expected residual value.
See BLM11025 for more guidance on residual value guarantees.
Contingent rent is defined in FRS 102 (pre 2024 amendments) and FRS 105 Glossary as ‘that portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than with the passage of time (e.g. percentage of future sales, amount of future use, future price indices, and future market rates of interest’).