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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Lease accounting: lease classification: minimum lease payments

The minimum lease payments are defined at paragraph 20 of SSAP 21 as the minimum payments (excluding charges for services and taxes to be paid by the lessor) over the remaining part of the lease term (BLM11015) and

  1. in the case of the lessee, any residual amounts guaranteed by the lessee or a related party; or
  2. in the case of the lessor, any residual amounts guaranteed by the lessee or by an independent third party.

For those applying FRS102, the FRS102 glossary defines minimum lease payments as

“The payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with

  1. for a lessee, any amounts guaranteed by the lessee by a party relate to the lessee; or
  2. for a lessor, any residual value guaranteed to the lessor by
i. the lessee;  
ii. a party related to the lessee;  
iii. a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.  

The definition in IAS 17 is essentially similar to the SSAP21 definition, except that in the case of a lessor the minimum lease payments include any residual value guaranteed to the lessor by a party related to the lessee.

IAS 17 also states that a guarantee from a third party unrelated to the lessor is only to be taken into account if they are financially capable of discharging the obligations under the guarantee. The IAS17 definition is the same as the FRS102 definition.

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.