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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Accounting for corporate finance: key concepts: finance leases

Leases under IAS 17

Under IAS 17 (‘Leases’), a finance lease contract is regarded as a contract for payments that are substantially the same as those under a loan agreement. A finance lease is therefore a financial instrument.

An operating lease, on the other hand, is regarded under IAS 17 as primarily an uncompleted contract committing the lessor to provide use of an asset in future periods in consideration of a fee. The lessor, therefore, continues to account for the leased asset itself rather than any amount receivable in the future under the contract. Thus an operating lease is not regarded as a financial instrument except in relation to individual payments currently due and payable. It should be noted that rights and obligations in respect of future payments that arise from operating leases are within the scope of the disclosure provisions of IAS 32 and IFRS 7 in addition to the requirements of IAS 17.

For FRS 101 users the requirements of IAS 17 noted above will apply.

Leases under FRS 102

For users of FRS 102 a finance lease is defined as being a lease which transfers substantially all the risks and rewards incidental to ownership of an asset. Although not described in terms of a contract for payments (like IAS 17) a finance lease under FRS 102 is also a financial instrument (albeit as noted in CFM21140 it is scoped out of Section 11 and 12 of FRS 102).

An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset. The lessor, therefore, continues to account for the leased asset itself rather than any amount receivable in the future under the contract. Thus an operating lease is not regarded as a financial instrument except in relation to individual payments currently due and payable. Disclosure regarding leases is addressed in Section 20 of FRS 102.