51²è¹Ý

This section is applicableÌýto entities applying FRS 102 pre 2024 amendments or FRS 105, and for lessors only under IFRS 16 and FRS 102 (2024 amendments).Ìý

See BLM17000Ìýfor lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments).Ìý

When accounting for operating leases accountants generally followÌýthe legal form of the transaction: payments for the hire of an asset.Ìý

Generally acceptedÌýaccounting practice under FRS 102Ìý(pre 2024 amendments) and FRS 105Ìýtreats the lessor as the owner of the asset, and not the lessee. The lessor recognisesÌýthe asset in the balance sheet and recognises the gross rentals as income. The lessee recognises the gross rentals paid as lease rental expenses.Ìý

An operating lessor records the leased asset on its balance sheet in the same way as it records any other fixed assetÌýand it should be depreciated over its useful life in the normal way.ÌýÌý

All the rentals receivableÌýare recognised as income, usually on a straight-line basis over the term of the lease. This means adding up all the rents for the entire period of the lease and spreading them evenly over the whole period.ÌýSee BLM12010Ìý

Similarly, an operating lessee’s rentals are charged to the profit and loss account, usually over the term of the lease and on a straight-Ìýline basis.ÌýSee BLM12020.ÌýAn operating lessee does not record theÌýasset on its balance sheet. ÌýOnly the rentals pass through its profit and loss account.Ìý

Operating lease accounting is very simpleÌýcompared with finance lease accountingÌýor the on-balanceÌýsheet modelÌýfor lessees under FRS 102 (2024 amendments) and IFRS 16. However, care should still be taken when considering depreciation of operating lease assets, initial indirect costs for lessors (BLM12015) and operating lease incentives (BLM12025).Ìý