Lease accounting: lease classification: importance of borderline issues
If the only issue is the timing of deduction (or taxation) of rentals, it is very unlikely to be cost-effective to spend time exploring whether an agreement satisfies the accounting definition of a finance lease or is an operating lease. In either case the tax treatment is to allocate rentals to periods of account in accordance with GAAP and the timing differences that may arise from the way a lease is classified are likely to be small.
There are, however, some exceptions to this general rule and the basis on which receipts and deductions are recognised for accountancy purposes could be very different.
In addition, and generally more significantly, whether a lease should be classified as a finance lease under GAAP may affect
- whether the lease is a long funding lease or not (BLM20000)
- the application of anti-avoidance legislation, much of which applies only to finance leases (for example the sale and finance leaseback and lease and finance leaseback provisions in Chapter 17 of CAA 2001, see CA28000 and CA28900 onwards).
Remember that the classification of leases for lessor and lessee may diverge for good reasons. But if you have had cause to investigate a borderline lease, you should consider sharing the information you have obtained about the lease with the case owner dealing with the other party to the lease.