BLM11010 – Lease accounting: lease classification: minimum lease payments

The minimum lease payments are defined at paragraph 20 of SSAP 21 as the minimum payments (excluding charges for services and taxes to be paid by the lessor) over the remaining part of the lease term ( BLM11015) and

1. in the case of the lessee, any residual amounts guaranteed by the lessee or a related party; or
   
   
2. in the case of the lessor, any residual amounts guaranteed by the lessee or by an independent third party.

The definition in IAS 17 is essentially similar, except that in the case of a lessor the minimum lease payments include any residual value guaranteed to the lessor by a party related to the lessee.

IAS 17 also states that a guarantee from a third party unrelated to the lessor is only to be taken into account if they are financially capable of discharging the obligations under the guarantee.

Note that leases are classified at inception ( BLM11030) and that only rarely is it appropriate to reclassify a lease after inception. Therefore it is possible for a lessor to enter into an operating lease and, at a later date, obtain a guarantee for the residual value. However, the lessor had to take an equity risk in the interim, and, if the market has moved adversely, may not be able to guarantee the asset’s original expected residual value.

See BLM11025 for more guidance on residual value guarantees.