Accounting for operating leases Under current FRS102 rules a company doesn’t need to show leased vehicles as an asset in the accounts or recognise the liability for the future obligations. The rental payments are just expensed to the statement of profit and loss, but a disclosure also needs to be included for the remaining commitment of the lease. This can make you seem less profitable but with a stronger balance sheet from a finance point of view. However, change is expected to the current rules on leasing from January 2025 which will see the need for an asset and liability to be recognised, regardless of whether the company leases or buys. This change would see assets under operating leases capitalised on your balance sheet (the ‘right-of-use’ asset) with a corresponding lease liability within creditors. The asset is then depreciated over the shorter of the useful life of the asset and the lease term. There will still be a need to differentiate between assets brought and assets leased though as the accounting treatment behind them will differ. Careful advance planning should be made once guidance has been published as this could significantly change the balance sheet for lessees, including the current ratio which – as noted above – many lenders may have written into financial covenants. There is no obvious conclusion about whether leasing or purchasing is better as both have pros and cons. The decision should be made on the merits to your company and any future plans you may have. If you would like further advice on the best way to proceed for your company, please give a member of our Business Advisory team a call on 0330 058 6559 or email hello@scruttonbland.co.uk
Operating Leases
On the other hand, the most obvious point is that the vehicle will not belong to you, and you do not have the option to sell it, as you might with a vehicle bought on HP, if your business needs change, or if you need to liquify your assets. Leased assets and their associated liabilities are not (currently) included on the company’s balance sheet; instead, you must disclose operating lease commitments in the notes to the accounts.
Pros: •
There is a reduced initial outlay of cash Fixed monthly spend, often includes maintenance costs built in to the monthly amount for the period of the lease. • Nearly always a brand new vehicle leased • Currently doesn’t show as a liability on the company’s balance sheet • Cons: • No use of the asset once lease term expired • Need to enter into a new contract to replace the asset • VAT is claimed monthly on the lease rentals. 50% cap for cars • May incur additional charges if you exceed the agreed usage as set out in the initial contract Leasing is a popular option as there is currently a surplus supply of vehicles after the peak of the pandemic, and the leasing process will provide some certainty over outgoings as the repayments are fixed over a finite period. However other costs have risen, and leasing companies will be passing those on their clients, so don’t expect any irresistible deals. Many lease contracts will have a maintenance plan as part of the contract and there is a tax relief element as VAT can be claimed back as payments are made.
Accounting Treatment
Purchase – if on finance If you have taken out debt to finance the purchase of the asset, you will have a large asset and liability on the balance sheet. A deposit is likely to be required initially and then the asset will be brought over a set period, which is likely to be longer than a lease period would be. This would add a lot more debt to your balance sheet over time and represents a bigger commitment than leasing. A fixed asset needs to be recognised for the acquisition costs which will then be depreciated over a number of years, often over the term of the lease. A liability is also recognised for the obligation of the future instalments of the agreement. Consequently, buying makes the company appear more profitable but results in a weaker balance sheet.
* www.gov.uk/government/statistics/ uk-trade-in-numbers
TRANSPORT AND LOGISTICS | SCRUTTON BLAND | 5
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