Finance lease or Operating lease?

Finance lease or Operating lease?

Didn't find your answer?

I have a client who I thought were renting a premises - but actually they have stated they have a self repairing lease - They are a LTD and what I need to know is would this be classed as a Finance lease rather than an operating lease?  I initially thought that it would be a finance lease as I asked the question if there would bear all the risks and rewards of the premises they said yes, but I have looked at the agreement and the structural repairs will be bourne by the landlord, although the windows will not, and the structural buildings insurance will be paid by the landlord, although I think the LTD will pay this back.  Struggling on how I should correctly treat this in the Accounts and for tax purposes as a finance lease or a operating lease.  

On top of this they want to set up a contingency fund for any repairs they may need to undertake in the future, so a provision for repairs, would this be allowable under FRS12??  I am thinking not 

Thanks in advance

Replies (5)

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By EmmaJee
06th Sep 2014 15:04

Landlord insured the property.. Company pays the rent.. Operating lease.
No provision for repairs.
How long is the lease ?
Any premium paid?
Is there any option to buy? Etc etc

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By T-A
06th Sep 2014 15:39

Lease

The lease is 5 years, no premium paid just an annual rent  - no option to buy so I guess this is an operating lease and provision not allowed

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By johngroganjga
06th Sep 2014 16:11

It would be very rare indeed for a normal property lease to meet the definition of a finance lease for accounting purposes.  In all my years as an accountant I have never seen it.

There is no need to struggle.  Just apply the normal finance lease tests in SSAP21 and see what comes out.

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By duncanedwards
06th Sep 2014 16:27

Thought it was just me John

My technical accounting knowledge is out of date but operating v finance lease is not something I have ever seen in the context of property.

The OP said "I asked the question if there would bear all the risks and rewards of the premises they said yes".

Unless we are talking a long-term lease - very long term - I can't see how "all the risks and rewards" could be transferred to the tenant.

Looks like there are developments afoot.  (Not read this yet.) 

http://www.grant-thornton.co.uk/Documents/CMS/IASB-lease-accounting-1006...

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By Mike Bath
08th Sep 2014 17:09

Repairs provision

If the lease requires them to make good any dilapidations at the end of the tenancy then I don't see why they shouldn't make a provision under FRS 12.  The contractual requirement would create the obligation and it's very rare that there would be no repairs required at the end of a 5 year rental period, so as long as the company can come up with a reliable basis for estimating the annual dilapidations cost they've got all of FRS 12's requirements covered.

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