The present value of the minimum lease payments is calculated
by using the interest rate implicit in the lease, which is the
interest rate that would apply in accordance with normal commercial
criteria, including GAAP. Exceptionally, where the interest rate
cannot be determined (as may happen in the case of some operating
leases) the interest rate implicit in the lease is the temporal
discount rate given by FA05/S70. (CAA01/S70O (4)).
Where the cost and the implied residual value of the asset
are known the interest rate implicit in the lease is merely a
matter of calculation. For example, if an asset cost £1000 and
the implied residual value is nil, the interest rate implicit in
the lease is the rate which, when applied to the lease rentals,
gives a present value of £1000.
The same principle can be applied to operating leases as long
as the cost and implied residual value are known. Using the example
in
BLM00065 if the rental payments are
known it is a relatively simple matter to calculate the interest
rate needed to ‘repay’ £30m of the £50m
‘loan’ over the term of the lease. The final £20m
is, of course, not repaid by the lessee but met by the lessor from
the value of the leased asset.
In some cases it may not be possible to establish the cost
and implied residual value of the leased asset, perhaps because the
rental is set by reference to current market rates. This is
unlikely to happen in the case of a lease that might be a funding
lease. But if it does, then in these circumstances it will be
necessary to assume an interest rate in order to calculate the
present value of the minimum lease payments. The statutorily
prescribed rate is the temporal discount rate given by FA05/S70.
This is a relatively low rate, which gives the rentals a relatively
high present value.
