BLM11010 - Lease accounting: lease classification: minimum lease payments

The minimum lease payments are defined in the FRS 102 Glossary as ‘the payments over the lease term (BLM11015) that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid and reimbursed to the lessor, together with:

(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or

(b) for a lessor, any residual value guaranteed to the lessor by (i) the lessee; (ii) a party related to the lessee; or (iii) a third party unrelated to the lessor that is 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 a residual value 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.

Contingent rent is defined in the FRS 102 Glossary as ‘that portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than with the passage of time (eg percentage of future sales, amount of future use, future price indices, and future market rates of interest’).