Q: 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 dollars for another 5 years. How should the value of the aircraft be recorded in international trade statistics: as a good or as a service (because it is being leased)? And should the transaction be entered only once (and thereafter revised if necessary) at the full value of the total duration of the lease?
A: The first consideration is what type of lease is being discussed: either operational or financial. It would most often be a financial lease in aircraft because financial leases typically last longer than one year, but please see the more detailed definitions for each below.
Suppose it is considered a financial lease (which entails a lease lasting longer than 1 year and under which the lessee undertakes most or all of the risks and benefits of ownership, but the lessor retains the legal title). In that case, the good is to be included as merchandise and excluded from services (as it is considered a loan from the lessor to the lessee). But the loan repayments may consist of a small portion of financial intermediation services indirectly measured (FISIM) if an intermediary is used.
On the other hand, an operational lease typically lasts for less than 1 year and/or where the lessor maintains a stock of the assets that users can hire or rent on-demand or on short notice (see IMTS para. 1.28 below more detailed definition). A good sold under the operational lease would be excluded from merchandise and included under Services (i.e., Other business services).
Considering the 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 would most typically be considered leased under a financial lease and would therefore be 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, which appears in the international investment position.
Timing of valuation: A financial lease is a contract under which the lessor, as the legal owner of an asset, conveys all the risks and rewards of ownership of the asset to the lessee substantially. In other words, the lessee becomes the economic owner of the asset. Because the lessee is the economic owner, a change of ownership between the seller of the goods and the lessee is recorded at the start of the lease. The lessor has a legal title but does not have economic ownership. In contrast, goods under operating leases do not change ownership to the lessee and are not included in general merchandise when delivered to the lessee. (IMTS2010, A.11)
Valuation: Goods under financial lease that cross borders should be valued based on similar goods crossing borders as the result of the sale. (IMTS 4.15 (d))
Sources:
IMTS2010 http://unstats.un.org/unsd/trade/eg-imts/IMTS%202010%20(English).pdf
1.28. Goods under financial lease. There are two kinds of leases in common usage: financial leases and operating leases. Goods are considered to be under financial lease if the lessee assumes the rights, risks, rewards, and responsibilities concerning the goods. From an economic point of view can be considered as the de-facto owner. Goods under financial lease should be included in international merchandise trade statistics. An operating lease is any lease that does not have the above characteristics. Goods under operating lease should be excluded from international merchandise trade statistics (see para.1.51 below). In practice, it may be difficult to differentiate between these two types of leases. Therefore, in some cases, the duration 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 included in international merchandise trade statistics when the general guideline is not applicable or sufficient based on the change of economic ownership between residents and non-residents(includes financial leasing, see para. 1.28 above). In this context, the acquisition of a ship or aircraft is treated as adding to the material resources (the reverse also applies).
BPM6 https://www.imf.org/external/pubs/ft/bop/2007/pdf/bpm6.pdf
5.57Examples of situations that would normally lead to a lease being classified as a financial lease include that:
(a) the lease transfers legal ownership to the lessee at the end of the lease term; or
(b) the lease has the option for the lessee to acquire legal ownership at the end of the lease term at a price that is sufficiently low that the exercise of the option is reasonably certain; or
(c) the lease term is for the major part of the economic life of the asset; or
(d) at inception, the present value of the lease payments amount to substantially all of the value of the asset; or
(e) if the lessee can cancel the lease, the lessor’s losses are borne by the lessee; or
(f) gains or losses in the residual value of the residual asset accrue to the lessee; or
(g) the lessee can continue the lease for a secondary period for payment substantially lower than market value.
These examples may not be conclusive that substantially all of the risks have been conveyed; for example, if the asset is conveyed to the lessee at the end of the lease at its fair value, then the lessor holds substantial risks ownership.
MSITS2010 http://unstats.un.org/unsd/tradeserv/tfsits/msits2010/docs/MSITS%202010%20M86%20(E)%20web.pdf
3.249. Operating leasing should be distinguished from financial leasing. Under a financial lease, the lessee undertakes most or all of the risks and benefits of ownership. There is a change in economic ownership, although the legal title remains with the owner. Although similar, a financial lease is seen as a loan, and therefore, the transactions concerned are excluded from services.
