Chapter BLM62250
| Published date | 10 April 2016 |
| Record Number | BLM62250 |
In some cases lessor companies would finance the purchase of the plant or machinery to be leased by pre-selling some, or nearly all, of the rental stream to be received from the lease. The lessor’s net investment in the lease was therefore restricted to the present value of the rentals to which the lessor remained beneficially entitled.
Example
The lessor enters into agreement to lease plant or machinery to the lessee. The lessor then sells the rights to the majority (say 99%) of the income due under that lease before it commences, and the cash it receives is then used to purchase the plant or machinery which it then uses to fulfil the lease commitments. This should ensure that:
- the lessor receives a lump sum that is commercially equivalent to the loan, and
- that as the right to almost all the income is sold the lessor’s net investment in the lease is very substantially reduced, to say 1%, of the expected income.
This analysis was on the basis that GAAP requires the net investment in the lease to be quantified at commencement of the lease term. As the lease does not commence until the asset is provided, and the right to lease rentals were already sold before that date, the net investment in the lease would only represent the present value of the rental income beneficially retained by the lessor.
To prevent continued manipulation of the net investment in the lease in this way the method of reaching the disposal value for disposals within item 5A of the table at section 61(2) CAA 2001 was amended, avoiding reliance on an accounting concept.
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Leases commencing on or after 13 November 2008The disposal value on the grant of a long funding finance lease, for leases incepted on or after 13 November 2008, is the greater of:
- the market value of the plant or machinery at the commencement of the term of the lease, or
- the qualifying lease payments.
The qualifying lease payments (QLPs) as defined in section 61(5A) CAA 2001, means the minimum payments under the lease including any initial payments (this covers premiums as well as day one or advance payments) but excludes:
- the finance charge...
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