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How to account for a property lease under FRS 102

Clarity on whether to show the property as an asset or an operating expenses only

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I am about to compile the first set of statutory accounts for a company where they currently pay an annual rent for a property for which they have a circa 15 year lease.  They did not pay anything to actually obtain the lease but they do pay a fixed amount on a quaterly basis towards the rent of the property that they have the lease for.  The rent has been shown as an expense and the lease does not sit on the balance sheet.  My question is that is it right for the property to not be indentified as an asset since they did not pay anything for it? Or should it sit on the balance sheet as an asset?  The previous accountant did not specify it as an asset and let it pass as an operating expense.  What is the common practice for property leases used for the purposes of using it say as an office, running a shop or a hotel under the FRS102 regime?

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07th Jul 2019 17:43

You need to value the property and then pretend you've bought it with an imaginary loan and are paying the loan back with the payments that you were thinking were really rent.

Sounds crazy - but that's accounting today, I'm afraid.

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By snazzy
to lionofludesch
07th Jul 2019 23:22

Firstly, thank you for such a prompt reply. That is what my understanding is too, but I am trying to convince myself whether there is actually any reason that would justify why the previous accountants never shown it as an asset? I am happy to correct this when I submit, but it's a sudden change in both the assets and liabilities, with large amounts, so wanted to ensure I was not mistaken in any way and I have read the Leases section under FRS 102 several times and I cannot see why they have not treated it as an Asset.

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to snazzy
08th Jul 2019 08:56

snazzy wrote:

Firstly, thank you for such a prompt reply. That is what my understanding is too, but I am trying to convince myself whether there is actually any reason that would justify why the previous accountants never shown it as an asset? I am happy to correct this when I submit, but it's a sudden change in both the assets and liabilities, with large amounts, so wanted to ensure I was not mistaken in any way and I have read the Leases section under FRS 102 several times and I cannot see why they have not treated it as an Asset.

Two possible reasons spring to mind.

1. It's immaterial (which you imply is not the case).

2. They got it wrong.

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By johnt27
to lionofludesch
08th Jul 2019 16:10

That might be IFRS treatment which, crazy or not, brings comparability into the financial statements of entities who may buy assets when compared to those that choose to lease them instead. This hasn't made its way into FRS 102 yet and is unlikely to do so for at least 5 or 6 years based on the current review cycles.

As has been said elsewhere, for a property lease it's usual that this is an operating lease treated as P&L cost, after accounting for any lease incentives, with a disclosure of the remaining lease commitments included in the accounts.

For a finance lease, where you take on ownership rights (or are likely to), at the end of the term it's an asset/liability arrangement. I've not come across a finance lease document in the last 10 years that hasn't adopted to the change in GAAP that predates this change in accounting treatment by a long way.

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to lionofludesch
17th Jul 2019 12:33

As Johnt27 has already said, this isn't right (yet), but might be in the future.

Rents of property are invariably operating leases. Fact of the matter is that leases on buildings that might last 100-200 years are rarely going to be anything other than operating leases.

IFRS16 is in, but thank goodness this isn't FRS102 yet.

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08th Jul 2019 09:46

It depends on what the lease says. If it's an Operating lease, as defined in the FRS, then the treatment that your predecessors adopted is correct. If it's a Finance lease, then it's wrong.

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08th Jul 2019 14:41

Common practice = P&L

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17th Jul 2019 11:36

Am I wrong to think that if the lease term is under 50 years it is normally a P&L expense, with different rules if it is over that? I am thinking of the CGT rules for the lessor, who would treat the rent as income.

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By johnt27
to Homeworker
17th Jul 2019 12:08

Yes, you are wrong that is.

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17th Jul 2019 12:28

Mike Bath is correct.

Its just a rental lease.

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By snazzy
19th Jul 2019 01:28

Many thanks for all the responses. I am drawing a consensus here that it is appropriate for it to be charged as an operating lease and thus expense rather than hold on balance sheet on the basis that the likely intent is that the lessee will not own or highly likely not to own the asset at the end of the lease period, which is the case in this instance. IFRS16 makes it a bit more complicated, but for now I will stick to FRS102 arrangement as that is the basis of accounts preparation for this company at the moment.

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