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How do I show a lease in my company's accounts?

It depends on the lease type.

If a lease passes on almost all the risks and rewards of owning the asset, the asset and the debt go on your balance sheet. If not, the rent is a cost spread over the lease, and payments still to come go in a note.

Published

At a glance

Applies to
Your company, if it pays for the right to use an asset for an agreed time
Two kinds
A passes on almost all the risks and rewards of owning the asset. Any other lease is an
Operating lease
The rent is a cost, usually spread evenly over the lease. Payments still to come go in a note

Sources

This entry is general information for directors of UK private limited companies, not advice about a particular company.

What to do

  1. Check whether it is a lease. It is one if it gives your company the right to use an asset for an agreed time, in return for payments. A deal can count even if it is not called a lease.

  2. Decide which kind it is, at the start. Ask whether the lease passes on almost all the risks and rewards of owning the asset.

  3. For an operating lease, spread the cost. Leave out charges for services such as insurance and maintenance. Spread the rest over the lease, counting any rent-free months.

  4. Note what is still to pay. At , add up the payments still to come. Include them in the note on commitments.

  5. For a finance lease, use the balance sheet. Record the asset and the debt. the asset, and split each payment between a and repaying the debt.

Sources

How it works

A lease is either a finance lease or an operating lease

A lease is an agreement that gives your company the right to use an asset for an agreed time. In return, your company makes one payment or a series of payments.

Some deals are not called leases but work the same way. Some outsourcing contracts are an example. What counts is the substance of the deal, not its name.

A passes on almost all the risks and rewards of owning the asset. Any other lease is an . Again, the substance decides, not the wording of the contract.

These signs normally point to a finance lease, on their own or together:

  • the asset becomes your company's by the end of the lease

  • your company can buy it at a price so low that, from the start, it is reasonably certain to buy

  • the lease covers most of the asset's working life

  • the payments, in today's money, come to almost all of the asset's value

  • the asset is so specialised that only your company can use it without major changes

These signs are not always conclusive. The type is decided at the start of the lease. It changes only if you and the owner agree to change the lease's terms. A simple renewal does not count.

For example

Say your company leases a machine for 5 years, and the machine becomes your company's at the end.

Ownership passes to your company, so this would normally be a finance lease.

Sources

The detail The exact rules

glossary: a lease is "an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time". A finance lease "transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred." A lease that is not a finance lease is an operating lease.

Paragraphs 15.3 and 15.4: some arrangements do not take the legal form of a lease but convey rights to use assets in return for payments, for example outsourcing arrangements, telecommunication contracts that provide rights to capacity and take-or-pay contracts. Whether an arrangement is, or contains, a lease is based on its substance. Section 15 does not apply to licensing agreements for items such as films, video recordings, plays, manuscripts, patents and copyrights (paragraph 15.1).

Paragraph 15.5 classifies a lease as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. Paragraph 15.6 says this depends on "the substance of the transaction rather than the form of the contract", and lists situations that individually or in combination would normally lead to a finance lease: (a) ownership passes to the lessee by the end of the ; (b) the lessee has an option to buy at a price expected to be sufficiently below for it to be reasonably certain, at inception, that the option will be exercised; (c) the lease term is for the major part of the asset's economic life even if title is not transferred; (d) at inception the present value of the minimum lease payments amounts to at least substantially all of the asset's fair value; (e) the asset is so specialised that only the lessee can use it without major modifications.

Paragraph 15.7 adds indicators: (a) if the lessee can cancel, the lessor's losses on cancellation are borne by the lessee; (b) gains or losses from changes in the fall to the lessee; (c) the lessee can continue the lease for a secondary period at a rent substantially below market rent. Paragraph 15.8: these examples and indicators are not always conclusive. Paragraph 15.9: classification is made at the inception of the lease and is changed only if the lessee and lessor agree to change the provisions of the lease (other than only by renewing it); the classification is then re-evaluated.

Sources

Operating lease: the rent is spread over the lease

For an operating lease, the rent is a cost in your . It is spread evenly over the lease, even if your payments are not. Charges for services such as insurance and maintenance are left out.

Why evenly? The cost follows the use your company gets from the asset over time, not the dates you pay. If another pattern matches that use better, you use that pattern instead.

A rent-free or cheaper period at the start of a lease is a "". So is cash the owner pays you to sign. Its is spread over the whole lease too, in the same way.

Our working: that gives the same answer as adding up all the payments, with the free months at nil, and spreading the total.

The lease period includes any you can choose, if at the start it is reasonably certain you will take it.

For example

Say your company leases a van for 2 years at £300 a month, under an operating lease. The first 2 months are free.

Payments over the lease
22 × £300
£6,600
Cost each year
£6,600 ÷ 2
£3,300

In year one you pay £3,000, but the cost is still £3,300.

Sources

The detail The exact rules

Paragraph 15.14: a lessee recognises lease payments under operating leases (excluding costs for services such as insurance and maintenance) as an expense over the lease term on a unless another systematic basis is representative of the time pattern of the user's benefit, even if the payments are not on that basis.

Paragraph 15.15: the aggregate benefit of lease incentives reduces the expense under 15.14 over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee's benefit from the use of the leased asset. Other costs the lessee incurs, such as ending an earlier lease, relocation or leasehold improvements, follow the section that applies to them.

Glossary, lease incentives: incentives from the lessor to the lessee to enter into a new or renew an operating lease, such as up-front cash payments, the lessor paying or taking on the lessee's costs, or "initial periods of the lease provided by the lessor rent-free or at a reduced rent". Lease term: the non-cancellable period plus any further terms the lessee has the option to continue for, when at inception it is reasonably certain the lessee will exercise the option.

Paragraph 15.16: where an operating lease becomes an onerous contract, Section 16 Provisions and also applies.

Sources

Operating lease: payments still to come go in the notes

Payments still to come under an operating lease are a . They are not shown on your .

Your company still has to show them. to a 's accounts must give the total of commitments that are not on the balance sheet.

For example

Say the van lease above has 12 months left at your year end.

Payments still to come
12 × £300
£3,600

Your note on commitments includes £3,600.

Sources

The detail The exact rules

Paragraph 15.17: a micro-entity discloses information about financial commitments, and contingencies not recognised in the statement of financial position arising from operating leases, under the relevant appendix to Section 6. Paragraph 6A.4: "The total amount of any financial commitments, guarantees and contingencies that are not included in the statement of financial position must be stated."

Sources

Finance lease: an asset and a debt on your balance sheet

A finance lease gives your company almost all the risks and rewards of owning the asset. So at the start of the lease, your company records the asset and the debt on its balance sheet.

Both start at the asset's fair value, or at the of the minimum lease payments if that is lower. Minimum lease payments are what your company must pay over the lease, leaving out charges for services and some other items. Costs your company pays only to arrange the lease are added to the asset.

Present value means the payments worked back to today's money, using the interest rate in the lease. If that rate cannot be worked out, your company's own borrowing rate is used.

Each payment is split into a and a repayment of the debt. The charge is set at a steady rate on the debt still owed. That means the charge falls as the debt is paid down.

The asset is under the usual rules for . If it will not clearly become yours, depreciate it over the lease or its useful life, whichever is shorter. At each year end, check whether it has lost value.

Sources

The detail The exact rules

Paragraph 15.10: at the commencement of the lease term, a lessee recognises its rights of use and obligations under finance leases as assets and at the fair value of the leased asset or, if lower, the present value of the minimum lease payments, determined at inception. Initial direct costs of the lessee are added to the asset.

Glossary, minimum lease payments: the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with any amounts guaranteed by the lessee or a party related to it.

Paragraph 15.11: the present value is calculated using the interest rate implicit in the lease or, if that cannot be determined, the lessee's incremental borrowing rate.

Paragraph 15.12: minimum lease payments are split between the finance charge and the reduction of the outstanding liability, with the finance charge allocated to give "a constant periodic rate of interest on the remaining balance of the liability". Contingent rents are expenses when incurred.

Paragraph 15.13: the asset is depreciated under Section 12 and Section 13. If there is no reasonable certainty of ownership by the end of the lease term, it is fully depreciated over the shorter of the lease term and its . The lessee also assesses at each reporting date whether the asset is .

Paragraph 4.4: a is due within one year unless the micro-entity has an unconditional right, at the end of the reporting period, to defer for at least 12 months after the reporting date.

: the balance sheet formats and the eight-line profit and loss format in Section C of Part 1 of Schedule 1 to SI 2008/409 have no lease or rent line. The FRS 105 lease paragraphs do not say which heading holds a finance-leased asset, its obligation or operating lease rent. SI 2008/409, Schedule 8, paragraph 3: fixed assets are assets intended for use on a continuing basis in the company's activities.

Sources

Consequences

If you get it wrong

Watch for these mistakes.

  • Counting only the rent you paid. With rent-free months or uneven payments, the yearly cost is then wrong. Spread the total, unless another pattern better matches your use.

  • Leaving out the note. The total of payments still to come must be in .

  • Changing the lease type on renewal. A simple renewal does not change it. Only an agreed change to the lease's terms does.

  • Claiming capital allowances on a leased asset. See " on a leased asset" below.

Sources

Less common situations

You heard the lease rules changed in 2026. Another UK , , moved to putting leases on the balance sheet. That applies for periods starting on or after 1 January 2026. The micro-entity standard, FRS 105, kept its lease rules.

Why no change? The standard-setter judged that the costs of changing would far exceed the for now.

Capital allowances on a leased asset. As a general rule, your company must own to claim on it. You cannot claim on things you lease, unless you have a hire purchase contract or long funding lease. So an asset on a finance lease may be in your accounts but not qualify.

You sell an asset and lease it back. If the leaseback is a , compare the sale price with the asset's value in your accounts. Any excess is spread over the lease. If it is an at fair value, any profit or loss counts straight away.

Sources

The detail The exact rules

Basis for Conclusions (as amended by the Periodic Review 2024), paragraph 54: "no amendments were made to Section 15 Leases". Paragraph 55: the decided not to keep FRS 105 consistent with FRS 102 on leases because the costs of aligning Section 15 with the on-balance sheet model introduced into Section 20 Leases of FRS 102 "were expected to significantly exceed the benefits at this time". The Periodic Review 2024 amendments apply for accounting periods beginning on or after 1 January 2026 (FRS 105 paragraph 1.10, as amended in February 2026).

Capital Allowances Act 2001, section 11(4)(b): as a general rule, expenditure is qualifying expenditure only if the person incurring it owns the plant or machinery as a result. Section 11(5): the general rule is affected by other provisions of the Act. GOV.UK: you cannot claim plant and machinery allowances on "things you lease (unless you have a or ) - you must own them".

Paragraph 15.31: in a that results in a finance lease, the seller-lessee does not recognise any excess of sale proceeds over as income at once, but defers and amortises it over the lease term. Paragraph 15.32: if it results in an operating lease established at fair value, any profit or loss is recognised immediately; other rules apply where the price is below or above fair value.

Sources

Worked example: Bramley Studio Ltd

Say Bramley Studio Ltd signs a 3-year lease of studio space on 1 January 2026. The rent is £500 a month, and the first 3 months are free. There is no option to .

Say the lease does not pass on almost all the risks and rewards of ownership, so it is an . Say no other pattern matches Bramley's use better than an even spread.

The cost of the lease

  • Rent at the full rate

    £18,000

    36 × £500

  • Less the free months

    −£1,500

    3 × £500. This is a lease incentive

  • Total payments

    £16,500

    33 × £500

  • Cost each year

    £5,500

    £16,500 ÷ 3, spread evenly

Sources

The 2026 accounts

  • Cost in the profit and loss account

    £5,500

    The even share for 2026

  • Rent paid in 2026

    £4,500

    9 × £500, April to December

  • Cost not yet paid

    £1,000

    £5,500 − £4,500. The lease rules do not say which balance sheet line holds it

  • Commitment in the notes

    £12,000

    24 × £500 still to pay in 2027 and 2028

Sources

Bramley's shows no asset or debt for its right to use the studio. Only a puts those on the balance sheet, and the micro-entity rules were not changed to add them.

Sources

Not covered here

How lease rent is treated for Corporation Tax, and accounts for the owner who leases an asset out. See fixed assets and depreciation, accruals and prepayments, the balance sheet and profit and loss layout and the Annual Investment Allowance.

Where this comes from

58 official sources. Open a group to see them.

The law 13 sources
HMRC 5 sources
GOV.UK 9 sources
Companies House 2 sources
FRC 29 sources

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