BLM12020 - Lease accounting: operating lease accounting: lessees’ accounting
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
This section is applicable to entities applying FRS 102 pre 2024 amendments or FRS 105.
See BLM17000 for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments).
FRS 102 (pre 2024 amendments) 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 (pre 2024 amendments) 20.15 are applicable.If you find out that bases other than straight-line are in use, please let a leasing technical adviser in CTI&G 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.