Operating Leases
Accounting for Operating Leases Under current FRS102 rules a company doesn’t need to show leased assets 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, this changes for accounting periods commencing on or after 1 January 2026 which will see – for all except those leases that are short-term (12 months or less) or low-value – the need for an asset and liability to be recognised, regardless of whether the company leases or buys. The change will see assets under operating leases capitalised on your balance sheet (the ‘right-of-use’ asset) with a corresponding lease liability within creditors. You can find out more about these changes on page 13 of this newsletter. Any decision on leasing or purchasing assets, whatever your business sector should always be made on the merits to your company and any future plans you have. For advice that’s bespoke to you on this topic, get in contact with Ben or one of the Business Advisory team by calling 0330 058 6559 or email hello@scruttonbland.co.uk
On the other hand, the most obvious point is that the asset will not belong to you. So, you won’t have the option to sell it if your business needs change, or if you need to realise 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. Accounting Treatment of a Purchase 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.
Pros:
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Reduced initial outlay of cash.
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Fixed monthly spend, often includes maintenance costs built into the monthly amount for the period of the lease.
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Currently doesn’t show as a liability on the company’s balance sheet.
Cons:
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No use of the asset once lease term expired.
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Need to enter into a new contract to replace the asset.
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VAT is typically claimed monthly on the lease rentals.
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May incur additional charges if you exceed the agreed usage as set out in the initial contract.
Leasing is a popular option and will provide some certainty over outgoings as the repayments are fixed over a finite period. However other costs often materialise, and leasing companies will be passing those on to 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.
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