BLM12020 - Lease accounting: operating lease accounting: lessees’ accounting

FRS 102 Section 20.15 says

“A lessee shall recognise lease payments under operating leases (excluding costs for services such as insurance and maintenance) as an expense over the lease term on a straight-line basis unless either:

(a) another systematic basis is 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 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.”

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 unless one of the two reasons in FRS 102 section 20.15 are applicable.

If you find out that bases other than straight-line are in use, please let BAI 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.