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Commission Regulation (EC) No 2238/2004 of 29 December
2004 amending Regulation (EC) No 1725/2003 adopting
certain international accounting standards in accordance
with Regulation (EC) No 1606/2002 of the European
Parliament and of the Council, as regards IASs IFRS 1,
IASs Nos 1 to 10, 12 to 17, 19 to 24, 27 to 38, 40 and
41 and SIC Nos 1 to 7, 11 to 14, 18 to 27 and 30 to 33
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Classification of
Leases
7. The
classification of leases adopted in this Standard is based on
the extent to which risks and rewards incidental to ownership
of a leased asset lie with the lessor or the lessee. Risks
include the possibilities of losses from idle capacity or
technological obsolescence and of variations in return because
of changing economic conditions. Rewards may be represented by
the expectation of profitable operation over the asset’s
economic life and of gain from appreciation in value or
realisation of a residual value.
8. A lease is
classified as a finance lease if it transfers substantially
all the risks and rewards incidental to
ownership. A lease is classified as an operating
lease if it does not transfer substantially all the risks
and rewards incidental to ownership.
9. Because the
transaction between a lessor and a lessee is based on a lease
agreement between them, it is appropriate to use consistent
definitions. The application of these definitions to the
differing circumstances of the lessor and lessee may result in
the same lease being classified differently by them. For
example, this may be the case if the lessor benefits from a
residual value guarantee provided by a party unrelated to the
lessee.
10. Whether a lease
is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the
contract ( See also SIC-27 Evaluating the Substance of
Transactions Involving the Legal Form of aLease.).
Examples of situations that individually or in combination
would normally lead to a lease being classified as a
finance lease are:
(a) the lease
transfers ownership of the asset to the lessee by the end of
the lease term;
(b) the lessee has
the option to purchase the asset at a price that is expected
to be sufficiently lower than the fair value at the date the
option becomes exercisable for it to be reasonably certain, at
the inception of the lease, that the option will be exercised;
(c) the lease term
is for the major part of the economic life of the asset even
if title is not transferred;
(d) at the inception
of the lease the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the
leased asset; and
(e) the leased
assets are of such a specialised nature that only the lessee
can use them without major modifications.
11. Indicators of
situations that individually or in combination could also lead
to a lease being classified as a finance lease are:
(a) if the lessee
can cancel the lease, the lessor’s losses associated with
the cancellation are borne by the lessee;
(b) gains or losses
from the fluctuation in the fair value of the residual accrue
to the lessee (for example, in the form of a rent rebate
equalling most of the sales proceeds at the end of the lease);
and
(c) the lessee has
the ability to continue the lease for a secondary period at a
rent that is substantially lower than market rent.
12. The examples and
indicators in paragraphs 10 and 11 are not always conclusive.
If it is clear from other features that the lease does not
transfer substantially all risks and rewards incidental to
ownership, the lease is classified as an operating lease. For
example, this may be the case if ownership of the asset
transfers at the end of the lease for a variable payment equal
to its then fair value, or if there are contingent rents, as a
result of which the lessee does not have substantially all
such risks and rewards.
13. Lease
classification is made at the inception of the lease. If at
any time the lessee and the lessor agree to change the
provisions of the lease, other than by renewing the lease, in
a manner that would have resulted in a different
classification of the lease under the criteria in paragraphs
7-12 if the changed terms had been in effect at the inception
of the lease, the revised agreement is regarded as a new
agreement over its term. However, changes in estimates (for
example, changes in estimates of the economic life or of the
residual value of the leased property), or changes in
circumstances (for example, default by the lessee), do not
give rise to a new classification of a lease for accounting
purposes.
14. Leases of land
and of buildings are classified as operating or finance leases
in the same way as leases of other assets. However, a
characteristic of land is that it normally has an indefinite
economic life and, if title is not expected to pass to the
lessee by the end of the lease term, the lessee normally does
not receive substantially all of the risks and rewards
incidental to ownership, in which case the lease of land will
be an operating lease. A payment made on entering into or
acquiring a leasehold that is accounted for as an operating
lease represents prepaid lease payments that are amortised
over the lease term in accordance with the pattern of benefits
provided.
15. The land and
buildings elements of a lease of land and buildings are
considered separately for the purposes of lease classification.
If title to both elements is expected to pass to the lessee by
the end of the lease term, both elements are classified as a
finance lease, whether analysed as one lease or as two leases,
unless it is clear from other features that the lease does not
transfer substantially all risks and rewards incidental to
ownership of one or both elements. When the land has an
indefinite economic life, the land element is normally
classified as an operating lease unless title is expected to
pass to the lessee by the end of the lease term, in accordance
with paragraph 14. The buildings element is classified as a
finance or operating lease in accordance with paragraphs 7-13.
16. Whenever
necessary in order to classify and account for a lease of land
and buildings, the minimum lease payments (including any
lumpsum upfront payments) are allocated between the land and
the buildings elements in proportion to the relative fair
values of the leasehold interests in the land element and
buildings element of the lease at the inception of the lease.
If the lease payments cannot be allocated reliably between
these two elements, the entire lease is classified as a
finance lease, unless it is clear that both elements are
operating leases, in which case the entire lease is classified
as an operating lease.
17. For a lease of
land and buildings in which the amount that would initially be
recognised for the land element, in accordance with paragraph
20, is immaterial, the land and buildings may be treated as a
single unit for the purpose of lease classification and
classified as a finance or operating lease in accordance with
paragraphs 7-13. In such a case, the economic life of the
buildings is regarded as the economic life of the entire
leased asset.
18. Separate
measurement of the land and buildings elements is not required
when the lessee’s interest in both land and buildings is
classified as an investment property in accordance with IAS 40
and the fair value model is adopted. Detailed calculations are
required for this assessment only if the classification of one
or both elements is otherwise uncertain.
19. In accordance
with IAS 40, it is possible for a lessee to classify a
property interest held under an operating lease as an
investment property. If it does, the property interest is
accounted for as if it were a finance lease and, in addition,
the fair value model is used for the asset recognised. The
lessee shall continue to account for the lease as a finance
lease, even if a subsequent event changes the nature of the
lessee’s property interest so that it is no longer
classified as investment property. This will be the case if,
for example, the lessee:
(a) occupies the
property, which is then transferred to owner-occupied property
at a deemed cost equal to its fair value at the date of change
in use; or
(b) grants a
sublease that transfers substantially all of the risks and
rewards incidental to ownership of the interest to an
unrelated third party. Such a sublease is accounted for by the
lessee as a finance lease to the third party, although it may
be accounted for as an operating lease by the third party.
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