BLM15015 - Lease accounting: finance lease accounting: finance lessees: balance sheet (fixed asset and depreciation)
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.
In effect, the accountancy treatment under FRS 102 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 asset and is depreciated like a fixed asset.
The amount recorded at the commencement of the lease term (BLM11030) as both an asset and as a liability is the fair value (BLM11020) of the leased asset or, if lower, 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).
The finance lease asset should be depreciated in accordance with FRS 102 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.
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.