Facts
Jay has entered into a lease of property whereby the title to the land does not pass to the entity at the end of the lease but the title to the building passes after 15 years. The lease commenced on July 1, 20X5, when the value of the land was $54 million and the building value was $18 million. Annual lease rentals paid in arrears commencing on June 30, 20X6, are $6 million for land and $2 million for buildings. The entity has allocated the rentals on the basis of their relative fair values at the start of the lease. The payments under the lease terms are reduced after every 6 years, and the minimum lease term is 30 years. The net present value of the minimum lease payments at July 1, 20X5, was $40 million for land and $17 million for buildings. The buildings are written off on the straight line basis over their useful life of 15 years. Assume an effective interest rate of 7%.
Required
Discuss how Jay should treat this lease under IAS 17.