BLM51030 - IFRS 16 leases: IFRS 16 lessees: taxation of IFRS 16 lessees: Long funding leases and the funding lease test
A long funding lease is
which is not
- a short lease (see BLM20120)
- an excluded lease of background plant or machinery for a building (see BLM20205)
- excluded because it is a lease of plant with land and the plant has a low percentage value (see BLM21600)
A lessee who has adopted IFRS 16 will apply these rules in the same way as any other lessee. The only change is that a lessee who has adopted IFRS 16 cannot have a funding lease by virtue of the finance lease test. A lessee who has adopted IFRS 16 can only have a funding lease by meeting either the lease payments test or the useful economic life test.
Example 1
Train Operator Ltd has adopted IFRS 16 and enters into a lease for plant and machinery which meets all of the conditions to be a long funding lease bar a consideration of whether it is a funding lease. The lessee recognises a lease liability of £1,000,000 at inception. The fair value of the asset is £1,200,000. Although conceivably the lease liability may differ from the present value of the minimum lease payments it would be unusual for that to be the case and therefore it would be expected that the lease entered into by Train Operator Ltd would meet the lease payments test, that is, the present value of the minimum lease payments is equal to or greater than 80% of the fair value of the leased asset.
Example 2
Bus Tours Ltd has adopted IFRS 16 and enters into a lease for plant and machinery which meets all of the conditions to be a long funding lease bar a consideration of whether it is a funding lease. The lease is for an initial period of 7 years with options to extend for a further 3 years and it is reasonably certain that the option to extend will be taken up. The accounting recognises a right-of-use lease which will be depreciated over 10 years. The expected useful economic life of the asset subject to the lease is 13 years. Although conceivably the term of the lease used in the useful economic life test may differ from the accounting recognition of the length of the lease it would be unusual for that to be the case and therefore it is expected that the lease entered into by Bus Tours Ltd would meet the useful economic life test, that is the term of the lease is more than 65% of the remaining useful economic life of the leased asset.