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HMRC internal manual

Business Leasing Manual

Lease accounting: operating lease accounting: lessees’ accounting

Paragraph 37 of SSAP 21 says

“The rental under an operating lease should be charged on a straight-line basis over the lease term, even if the payments are not made on such a basis, unless another systematic and rational basis is more appropriate.”

FRS102 Section 20 paragraph 15 says that lease payments under an operating lease (excluding costs for services such as insurance and maintenance) are recognised as an expense over the lease term on a straight-line basis unless either:

“(a) another systematic basis is more representative of the time pattern of the user’s benefit, even if the payments are 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 because of factors other than general inflation, then this condition (b) is not met.” 

Paragraph 34 of IAS 17 is similar to SSAP21, providing that lease payments under an operating lease

“…are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit, even if the payments are not on that basis.”

This means that, if no payment is made in the first year (although the asset is in use during that year), the total rentals should be charged over the term of the lease. Similarly where there is a high initial payment the total payable should be spread evenly over the lease term.

If you find out that bases other than straight-line are in use, please let CTIAA (CT&BIT) know before accepting them.

Examples

The lease term is 5 years and £10,000 rentals are payable 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 an expense each year.

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