BLM11220 | Lease accounting: lease classification: independent approach

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 applicable to entities applying FRS 102 pre 2024 amendments or FRS 105, and for lessors only under IFRS 16 and FRS 102 (2024 amendments).

See BLM17000 for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments).

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.

Under the on-balance sheet lessee model under FRS 102 (2024 amendments) and IFRS 16, lack of symmetry between lessor and lessee accounting treatment will increase.