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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: finance lessees: balance sheet (general)

Paragraph 32 of SSAP 21 states that

“A finance lease should be recorded in the balance sheet of a lessee as an asset and as an obligation to pay future rentals. … “

For those UK GAAP entities adopting FRS102, Section 20 paragraph 9 says

“.. a lessee shall recognise its rights of use and obligations under finance leases as assets and liabilities …”.

This means that finance lessees are required to show

  • the leased asset as its property in its balance sheet even though it doesn’t legally own it; and
  • the capital element it is due to pay in the rentals (the ‘loan’) as a liability in its balance sheet.

This makes it clear to the world at large just how much the lessee has, in effect, borrowed.

Paragraph 36 of SSAP 21 states that

“An asset leased under a finance lease should be depreciated over the shorter of the lease term (as defined in paragraph 19) and its useful life. …”

FRS102 Section 20 paragraph 12 says

“A lessee shall depreciate an asset leased under a finance lease in accordance with Section 17 Property, Plant and Equipment”.

This means that although the asset is not owned it is depreciated in the same way as an owned asset.

Essentially the same treatment is required under IFRS and FRS101 (paragraphs 20 and 27 of IAS 17).

There is further guidance in the following paragraphs.