BLM15010 - Lease accounting: finance lease accounting: finance lessees: balance sheet
Source: gov.uk (2025-08-28)


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 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm50000) chapter.

This section is applicable to entities applying FRS 102 pre 2024 amendments or FRS 105.

See BLM17000 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm17000) for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments).

Balance sheet

FRS 102 (pre 2024 amendments) 20.9 says

“.. a lessee shall recognise its rights of use and obligations under finance leases as assets and liabilities …”.

This means that finance lessees are required to show

the leased asset as its property in its balance sheet even though it doesn't legally own it; and

the capital element it is due to pay in the rentals (the 'loan') as a liability in its balance sheet.

This makes it clear just how much the lessee has, in effect, borrowed.

FRS 102 (pre 2024 amendments) 20.12 says

“A lessee shall depreciate an asset leased under a finance lease in accordance with Section 17 Property, Plant and Equipment”.

This means that although the asset is not owned it is depreciated in the same way as an owned asset unless it is reasonably certain that the lessee will not obtain ownership in which case the leased asset is depreciated over the shorter of the lease term and its useful life.

Fixed asset and depreciation

In effect, the accountancy treatment under FRS 102 (pre 2024 amendments) 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 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11030)) as both an asset and as a liability is the fair value (BLM11020 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11020)) of the leased asset or, if lower, the present value of the minimum lease payments (BLM11010 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/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 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/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 BLM11201 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm11201)).

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.

Depreciation – Definition and Example

FRS102 (pre 2024 amendments) glossary has the following definitions:

Depreciation: “The systematic allocation of the depreciable amount of an asset over its useful life”

Depreciable amount: “The cost of an asset, or other amount substituted for cost, less its residual value”

Useful life: “The period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity.”

Example:

If an asset is bought for £10,000 and is expected to have a useful life of 5 years it may be expected to have no value at the end of its life – or (say) £2,000.

If the asset is expected to have no value after 5 years, depreciation will write off £10,000 over the five years.

If it is expected to have a value of £2,000 after 5 years, depreciation will write off £8,000 over the 5 years.

The depreciation must be written off in a systematic way to reflect how the economic benefit is consumed. In practice it is often written off on a straight-line basis (£2,000 or £1,600 a year in this example).

The way in which depreciation is written off is important for tax purposes, see BLM32500 (https://www.gov.uk/hmrc-internal-manuals/business-leasing-manual/blm32500) onwards. If you think the accounting is not in accordance with GAAP you should consult your Advisory Accountant.