(paragraphs B55-B57)

BCZ241 In 2009, the IASB amended the IAS 17 requirements for classification of the land element in long-term leases. IAS 17 had previously stated that a lease of land with an indefinite economic life would normally be classified as an operating lease. However, in 2009, the IASB removed that statement from IAS 17, having concluded that it might lead to a classification of land that does not reflect the substance of the transaction.

BCZ242 In reaching this conclusion the IASB had considered the example of a 999‑year lease of land and buildings. It had noted that, for such a lease, significant risks and rewards associated with the land during the lease term would have been transferred by the lessor despite there being no transfer of title.

BCZ243 The IASB had also noted that the lessor in leases of this type will typically be in a position economically similar to an entity that sold the land and buildings. The present value of the residual value of the property in a lease with a term of several decades would be negligible. The IASB had concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessor.

BCZ244 The IASB replaced the previous guidance with a statement (now in paragraph B55 of IFRS 16) that, in determining whether the land element is an operating lease or a finance lease, an important consideration is that land normally has an indefinite economic life.