BLM51035 - IFRS 16 leases: FRS 16 lessees: taxation of IFRS 16 lessees: taxation of long funding leases

A long funding lease which is accounted for as a right-of-use asset by a lessee is taxed as a long funding finance lease.

The only exception to this rule is where a lessee has a long funding operating lease and adopts IFRS 16. Under those circumstances the lease treatment is grandfathered and it continues to be taxed as a long funding operating lease.

If the lessee has a right-of-use asset which is being taxed as a long funding finance lease and it moves to another accounting standard where the lease is neither a right-of-use asset nor a finance lease the lessee is treated as if

• the lease had terminated immediately before the time of the change
• another lease had been entered into immediately after the time of the change, and
• the lease was a long funding lease in the case of the lessor.

The practical effect of this provision is that the lessee will be taxed as though they have disposed of a long funding finance lease and entered into a new long funding operating lease.