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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Lease accounting: lease classification: independent approach

Under GAAP (UK, IFRS and FRS101) each party to a lease must make its own assessment as to whether it has a finance lease or an operating lease. Therefore a lease may not be classified in the same way by both parties to the lease contract

This difference may arise because the ‘minimum payments’ and balance of risks and rewards can be different for the lessee and lessor in an arrangement, particularly a complex one, see BLM11230.

In particular, the minimum payments may differ because a lessor may obtain a residual value guarantee from a person unconnected with the lessee (BLM11025). Taking account of the guarantee may make the lease a finance lease from the lessor’s perspective, but not from the lessee’s perspective.

In addition, the possibility that lessor and lessee take different views on lease classification may become very slightly magnified when one of the parties prepares accounts in accordance with IFRS or FRS101 and the other does not.