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 applicableÌýto entities applying FRS 102 (pre 2024 amendments)Ìýor FRS 105.Ìý
See BLM17000 for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments)Ìý
The minimumÌýlease payments are defined in the FRS 102Ìý(pre 2024 amendments) and FRS 105ÌýGlossary as ‘the payments over the lease term [BLM11015]Ìýthat 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:Ìý
(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; orÌý
(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’.Ìý
Note that leases are classified at inceptionÌý(BLM11030) and that only rarely is it appropriate toÌýreclassify a lease after inception. Therefore,Ìýit is possible for a lessor to enter intoÌýan 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.Ìý
See BLM11025 for more guidance on residual value guarantees.Ìý
Contingent rent is defined in ÌýFRS 102Ìý(pre 2024 amendments) and FRS 105ÌýGlossary 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.Ìýpercentage of future sales, amount of future use, future price indices, and future market rates of interest’).Ìý
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