SolvedBLM15535 | Lease accounting: finance lease accounting: finance lessees: example 1: accounting entries when the 'loan' is repaid
From HM Revenue & Customs · Business Leasing Manual
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.
This section is applicable to entities applying FRS 102 pre 2024 amendments or FRS 105.
See BLM17000 for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments).
The accounting is as for a loan. When the loan has been repaid, the liability disappears from the balance sheet. But the leased asset remains in the balance sheet, even though it is still subject to the terms of the lease. The accounting entries based on Example 1 at BLM15505 are:
| Balance sheet at end | Year 1 (£) | Year 2 (£) | Year 3 (£) | Year 4 (£) | Year 5 (£) |
|---|---|---|---|---|---|
| Assets | |||||
| Leased Asset | 50,000 | 50,000 | 50,000 | 50,000 | 50,000 |
| Depreciation | (2,500) | (5,000) | (7,500) | (10,000) | (12,500) |
| Net book value | 47,500 | 45,000 | 42,500 | 40,000 | 37,500 |
| Liabilities | |||||
| Lease creditor | 50,000 | 41,414 | 32,173 | 22,227 | 11,522 |
| Repayment | (8,586) | (9,241) | (9,946) | (10,705) | (11,522) |
| Net | 41,414 | 32,173 | 22,227 | 11,522 | Nil |
| Profit and Loss A/c | |||||
| Depreciation | 2,500 | 2,500 | 2,500 | 2,500 | 2,500 |
| Finance Charge | 3,814 | 3,159 | 2,454 | 1,695 | 878 |
When the 'loan' has been repaid, in economic terms the lessee is now the only party with a significant interest in the underlying asset, yet the lessor retains legal ownership.