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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: finance lessees: balance sheet (fixed asset and depreciation)

In effect, the accountancy treatment under GAAP is as if the trader had bought the asset and financed the purchase by way of a loan. In broad terms, the cost to the lessor of buying the leased asset is shown in the lessee’s balance sheet as a fixed capital asset and is depreciated like a fixed capital asset.

The amount recorded at the outset as both an asset and as a liability is the present value of the minimum lease payments (BLM11010), which will usually be the same as or similar to the cost of the asset to the lessor. (The concept of ‘present value’ is explained at BLM11210)

Under SSAP 21 the amount as an asset , less any expected residual value, is written off over the shorter of

  • the lease term, including any secondary period or periods when it is reasonably certain that the lease will not be terminated beforehand, and
  • the estimated useful life of the asset.

For those UK GAAP entities applying FRS102, the finance lease asset should be depreciated in accordance with Section 17. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.

Under IAS 17 the depreciation requirement is similar. However IAS 17 states that the depreciation policy must be consistent with the policy applied for similar owned assets. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term then the asset shall be fully depreciated over its useful life.

For a finance lease, we would normally expect the useful life to be at least as long as the lease term (including primary and secondary periods - BLM00620). This is because lessors like to lease assets for a primary period which is shorter than the life of the asset so that they have the maximum security if something goes wrong. In other words, they want the asset always to be worth more than the outstanding debt.

It is a legitimate cause for enquiry if an asset is depreciated over less than its expected useful life, particularly where the asset is depreciated over a period of less than the primary period of the lease, see BLM32055 and BLM32500 onwards.