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Leasing of aircraft -- financial leasing


Question: If an aircraft is leased via a5-year leasing agreement, the total value of the leased aircraft may be 5million dollars with payment of 1 million dollars for each year of the lease;and at the end of the 5 years, the lease may be renewed for 5 million dollarsfor another 5 years. How should the value of the aircraft be recorded ininternational trade statistics: as a good or as a service (because it is beingleased)?  And should the transaction beentered only once (and thereafter revised if necessary) at the full value ofthe total duration of the lease?

The firstconsideration is what type of lease is being discussed: either operational orfinancial. In the case of aircraft, it would most often be a financial lease,because financial leases typically last longer than one year, but please seethe more detailed definitions for each below. 

If it isconsidered a financial lease (which entails a lease lasting longer than 1 yearand under which the lessee undertakes most or all of the risks and benefits ofownership but the lessor retains the legal title), the good is to be includedas merchandise and excluded from services (as it isconsidered a loan from the lessor to the lessee). But the loan repayments mayinclude a small portion of financial intermediation services indirectly measured (FISIM) if an intermediary is used.

Anoperational lease on the other hand is one that typically lasts for less than 1year and/or where the lessor maintains a stock of the assets that users canhire or rent on demand, or at short notice (see IMTS para. 1.28 below for moredetailed definition) . A good sold under operational lease would be excludedfrom merchandise and would be included under Services (i.e.,Other business services).

Consideringthe more detailed definition of a financial lease cited below in IMTS para.1.28-1.29 and the examples cited in BPM6 para. 5.57, lease of an aircraft wouldmost typically be considered leased under a financial lease and would thereforebe recorded under merchandise trade (please see paragraphs 1.28 and 1.29 fromIMTS2010 below) and excluded from trade in services (see MSITS2010 para. 3.249below), because it is considered a loan from the lessor to the lessee, whichappears in the international investment position.

Timing of valuation: A financial leaseis a contract under which the lessor as legal owner of an asset conveyssubstantially all the risks and rewards of ownership of the asset to thelessee. In other words, the lessee becomes the economic owner of the asset.Because the lessee is the economic owner, a change of ownership between theseller of the goods and the lessee is recorded at the start of the lease.The lessor has legal title, but does not have economic ownership. In contrast,goods under operating leases do not change ownership to the lessee, and thusare not included in general merchandise when delivered to the lessee.(IMTS2010, A.11)

Valuation: Goods underfinancial lease that cross borders should be valued on the basis of the pricesof similar goods crossing borders as the result of sale. (IMTS 4.15 (d))



1.28. Goodsunder financial lease. There are two kinds of leases in common usage:financial leases and operating leases. Goods are considered to be underfinancial lease if the lessee assumes the rights, risks, rewards andresponsibilities in relation to the goods and from an economic point of viewcan be considered as the de facto owner. Goods under financial lease shouldbe included in international merchandise trade statistics. An operatinglease is any lease which does not have the above characteristics. Goods underoperating lease should be excluded from international merchandise tradestatistics (see para.1.51 below). In practice, it may be difficult todifferentiate between these two types of leases. Therefore, in some cases, theduration of the lease can be used as an indication of whether the lease is financial(one year or more) or operating (less than one year).

1.29.Ships and aircraft. These goods are to be included in international merchandisetrade statistics when the general guideline is not applicable or sufficientbased on the change of economic ownership between residents and non-residents(includes financial leasing, see para. 1.28 above). In this context, the acquisitionof a ship or aircraft is treated as adding to the material resources of acountry (the reverse also applies).


5.57Examples of situations that would normally lead to a lease being classified asa financial lease include that:

(a) thelease transfers legal ownership to the lessee at the end of the lease term; or

(b) thelease has the option for the lessee to acquire legal ownership at the end ofthe lease term at a price that is sufficiently low that the exercise of theoption is reasonably certain; or

(c) thelease term is for the major part of the economic life of the asset; or

(d) atinception, the present value of the lease payments amount to substantially allof the value of the asset; or

(e) ifthe lessee can cancel the lease, the lessor’s losses are borne by the lessee;or

(f) gainsor losses in the residual value of the residual asset accrue to the lessee; or

(g) thelessee has the ability to continue the lease for a secondary period for apayment substantially lower than market value.

Theseexamples may not be conclusive that substantially all of the risks have beenconveyed; for example, if the asset is conveyed to the lessee at the end of thelease at its fair value at that time, then the lessor holds substantial risksof ownership.


3.249.Operating leasing should be distinguished from financial leasing. Under afinancial lease, the lessee undertakes most or all of the risks and benefits ofownership. There is a change in economic ownership although the legal titleremains with the owner. Although similar, a financial lease is seen as aloan and therefore the transactions concerned are excluded from services.  

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