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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
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Lease accounting: operating lease accounting: lessor accounting for rental income

SSAP 21 (paragraph 43) states that

“Rental income from an operating lease, excluding charges for services such as insurance and maintenance, should be recognised on a straight-line basis over the period of the lease, even if the payments are not made on such a basis, unless another systematic and rational basis is more representative of the time pattern in which the benefit from the leased asset is receivable.”

For those entities adopting FRS102, Section 20 paragraph 25 says:

“A lessor shall recognise lease income from operating leases (excluding amounts for services such as insurance and maintenance) in profit or loss on a straight-line basis over the lease term, unless either:

(a) another systematic basis is representative of the time pattern of the lessee’s benefit from the leased asset, even if the receipt of payments is not on that basis; or

(b) the payments to the lessor are structured to increase in line with expected general inflation (based on published indexes or statistics) to compensate for the lessor’s expected inflationary cost increases. If payments to the lessor vary according to factors other than inflation, then condition (b) is not met

IAS 17 (paragraph 50) takes a very similar approach:

“Lease income from operating leases shall be recognised in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.”

If you find out that bases other than straight-line are in use, please let CT & VAT (Technical) know.

Examples

The lease term is 5 years and £10,000 rentals are receivable on the first day of each of years 2 to 5. The total rentals of £40,000 should be spread evenly, with £8,000 recognised as income in each year.

The lease term is 5 years and £20,000 rentals are receivable on the first day of year 1, and £10,000 is receivable on the first day of each of years 2 to 5. The total rentals of £60,000 rentals should be spread evenly, with £12,000 recognised as income in each year.