BLM20525 - Defining long funding leases: funding leases that are not long funding leases: short leases: leases with balloon rentals - meaning of residual value implicit in the lease
Where a lease with a term of more than 5 years but not more than 7 years includes a balloon rental it will not meet the definition of a short lease. (A balloon rental is a rental payable at or near the end of the lease term that is materially larger than previous rental payments.)
»Ê¹ÚÌåÓýapp residual value implicit in the lease is the value after the balloon has been accounted for and so a lease with a balloon does not meet the test for being a short lease because it fails to meet the conditions set out in BLM20515.
For example, a lessor buys an asset for £10,000 and leases it for 6 years at £1,500 a year with an additional balloon rental of £5,000 at the end of year 6. »Ê¹ÚÌåÓýapp total rentals are £14,000. »Ê¹ÚÌåÓýapp lessee also has the right to sell the asset (as agent for the lessor) at the end of the lease term and retain 99.9% of the proceeds.
»Ê¹ÚÌåÓýapp lessee will hope that the asset sells for at least £5,000. In this example it is reasonable to assume that the residual value implied in the lease is nil. However, the lease would not be a short lease because it would not meet conditions in BLM20515.