The prudential treatment of leases is defined in article 134(7) of Regulation (EU) No 575/2013 (CRR). It states that the leases’ exposure is composed of (i) minimum lease payments and (ii) residual value.

With regard to the residual amount Q&A 2014_1241 clarifies that, for the purposes of the calculation of risk weighted exposure amount with the formula “1/t * 100% * residual value” included in the above mentioned article, the residual value shall be the “undiscounted estimated residual value at the end of the lease term which is reassessed periodically to ensure continued appropriateness”.

Furthermore, according to the currently applicable instructions on template C 07.00 of Annex I of Regulation (EU) No 680/2014 (ITS on Supervisory Reporting), column 010 refers to Art. 111 CRR and therefore here the accounting value is relevant to populate this column, and columns 040, 110, 150 as well which refer to the exposure value and not the risk weighted exposure amount (of the residual value of the leasing asset) which is subject to Art. 134 (7) sentence 5 and calculated according to the formula “1/t * 100% * residual value”.

In the light of that, the following figures shall be included in template C 07.00 in order to ensure consistency with both accounting framework / COREP instructions and the EBA Q&A 2014_1241:

1.      Column 010 “ORIGINAL EXPOSURE PRE CONVERSION FACTORS” – the accounting value of payments and residual value before value adjustments and provisions. Under IFRS 16, it implies that payments and residual value are discounted figures;

2.      Column 040 “Exposure net of value adjustments and provisions” – the accounting value of payments and residual value. The value in column 010 minus the value in column 030. Both the figures are discounted;

3.      Column 110 “NET EXPOSURE AFTER CRM SUBSTITUTION EFFECTS PRE CONVERSION FACTORS” – the accounting value of payments. The accounting value (discounted value) of the residual value is included only if the unfunded credit protection provided for in article 134(7) CRR does not apply, otherwise the residual value is reduced for the guarantee value (that is included in columns 050 and 090 of C 07.00 and treated consequently as an exposure to the guarantor).

4.      Column 150 “FULLY ADJUSTED EXPOSURE VALUE (E*)” – includes the same figure of column 110 because the CRM technique provided for in article 223 of CRR does not apply to leases;

5.      Column 200 “Exposure value” – includes the value that results from the calculation stated in v0308_m, that is, the residual value should be undiscounted.  

This should include the same figure of column 150 because the CCF equals 100%.

6.      Column 215/220 “Risk weighted exposure amount pre/after SME supporting factor” - only here will be a change in the treatment of the residual value. According to Art. 134 (7) sentence 5 the risk weighted exposure amount of the residual value will be calculated according to the formula: 1/t * 100% * residual value. EBA Q&A 2014_1241 clarifies that, only for the purposes of the calculation of the formula “1/t * 100% * residual value” included in the above mentioned article, the residual value shall be the “undiscounted estimated residual value at the end of the lease term which is reassessed periodically to ensure continued appropriateness”.

It is only for the calculation of the risk-weighted exposure amounts (column 215) that the undiscounted figure of residual value should be considered, in the formula (1/t * 100% * Residual Value).