Finance leases are defined in similar way under both UK GAAP
and IFRS (see
BLM11205).
UK GAAP defines a finance lease in the following terms
(paragraph 15, SSAP 21):
“A finance lease is a lease that
transfers substantially all the risks and rewards of ownership of
an asset to the lessee. It should be presumed that such a transfer
of risks and rewards occurs if at the inception of the lease the
present value of the minimum lease payments including any initial
payment, amounts to substantially all (normally 90% or more) of the
fair value of the leased asset. The present value should be
calculated by using the interest rate implicit in the lease (as
defined in paragraph 24). If the fair value of the asset is not
determinable, an estimate thereof should be used.”
In general terms, the definition identifies whether or not
the lessor has the bulk of the equity interest in the leased asset.
In particular, what this is saying is that it should be presumed
that a lease is a finance lease where the payments by the lessee
are certain (subject to the credit risk) to repay substantially all
of the cost of the asset (the 'loan') to the lessor plus a
commercial rate of interest.
Note that ‘substantially all’ means
‘normally 90% or more’ and the definition is based on
risks and rewards. It is particularly important to note that the
figure of 90% is only indicative – that is, the presumption
in the definition is rebuttable.
Therefore, where a lease meets the conditions in paragraph 15
of SSAP 21, the presumption that it should be classified as a
finance lease may in exceptional circumstances be rebutted if it
can be clearly demonstrated that the lease in question does not
transfer substantially all the risks and rewards of ownership
(other than legal title) to the lessee. Correspondingly, the
presumption that a lease which fails to meet the conditions in
paragraph 15 is not a finance lease may in exceptional
circumstances be rebutted, see paragraph 16 of SSAP 21.
For example, exceptionally, the rentals can pay all the fair
value of the leased asset and GAAP will still regard the lease as
an operating lease if the lease does not transfer substantially all
the rewards of ownership to the lessee. Equally, it might be
possible for the rentals to pay less than 90% of the fair value of
the asset and for the lease to be regarded as a finance lease if
the lease does transfer substantially all the rewards of ownership
to the lessee.
Any question of whether a lease is, or is not, a finance
lease must be referred to your local advisory accountants.
