Finance Leasing Manual - FLM2.22

Operating leasing: accountancy treatment

When accounting for operating leases accountants generally follow the legal form of the transaction. They accept that the lessor is the owner of the asset, and not the lessee. The lessor shows the asset in the balance sheet and recognises the gross rentals ('interest' and 'capital') as income. The lessee also deals with the gross rentals as revenue hire deductions. There is no 'loan'.

For accountancy purposes operating lease receipts and deductions are normally recognised 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. The rentals are not split into 'interest' and 'capital' elements for any purpose.