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This section is applicable听to entities applying FRS 102 pre 2024 amendments or FRS 105, and for lessors only under IFRS 16 and FRS 102 (2024 amendments).听

See BLM17000听for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments).听

When accounting for operating leases accountants generally follow听the legal form of the transaction: payments for the hire of an asset.听

Generally accepted听accounting practice under FRS 102听(pre 2024 amendments) and FRS 105听treats the lessor as the owner of the asset, and not the lessee. The lessor recognises听the asset in the balance sheet and recognises the gross rentals as income. The lessee recognises the gross rentals paid as lease rental expenses.听

An operating lessor records the leased asset on its balance sheet in the same way as it records any other fixed asset听and it should be depreciated over its useful life in the normal way.听听

All the rentals receivable听are recognised as income, usually 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.听See BLM12010听

Similarly, an operating lessee鈥檚 rentals are charged to the profit and loss account, usually over the term of the lease and on a straight-听line basis.听See BLM12020.听An operating lessee does not record the听asset on its balance sheet. 听Only the rentals pass through its profit and loss account.听

Operating lease accounting is very simple听compared with finance lease accounting听or the on-balance听sheet model听for lessees under FRS 102 (2024 amendments) and IFRS 16. However, care should still be taken when considering depreciation of operating lease assets, initial indirect costs for lessors (BLM12015) and operating lease incentives (BLM12025).听