BLM00035 - Introduction: Leasing: Lease classification

FRS 102 classifies leases as finance leases or operating leases.

For lessees, IFRS 16 removes the distinction between finance leases and operating leases and introduces a single lessee accounting model that, with some limited exemptions for short-term leases and leases of low value assets, will apply to all leases.

For lessors, IFRS 16 retains the distinction between finance lease and operating lease.

The nature of the asset does not affect the classification of the lease. The characteristics of a finance lease of land are therefore the same as those of a finance lease of plant or machinery.

Lease classification – whether a lease is a finance lease or an operating lease – remains important for tax purposes. As this distinction no longer exists for lessees preparing accountings using IFRS 16, lessees must determine whether they would have accounted for the lease as a finance lease or an operating lease, were they required to make that determination under generally accepted accounting practice (GAAP)

An outline of the distinction between finance and operating leases is at BLM00040 and BLM00045. Further details are at BLM11000 onwards.