Operating Lease Arrangement fees under UK GAAP

accountantemma

We are renting a building and have paid legal fees in connection with the arrangement of the lease. should these be prepaid over the term of the lease to the fist break clause or do they need to be expensed as incurred?

davealucas

@accountantemma As you are probably aware, the accounting arrangements for operating leases have changed and should now be treated the same as finance leases, unless they have 12 months or less to go.

Legal fees in connection with arranging the lease can be capitalised as part of the cost of the lease and should be written off over the term of the lease in the form of depreciation.

accountantemma

Thanks @davealucas
I'm not sure I follow though - as it is an operating lease, under UK GAAP, the rent costs are not capitalised and depreciated, rather prepaid and expensed to the P&L over a straight line.

davealucas

@accountantemma IFRS16 changed the rules quite significantly on leases. Basically IFRS16 (which the UK GAAP has to follow) defines a lease term as the non-cancellable period for which the lessee has the right to use an underlying asset including optional periods when an entity is reasonably certain to exercise an option to extend (or not to terminate) a lease.

In simple terms, a lease that exceeds 12 months gives the lessee an underlying asset which must be capitalised for the term of the lease. This applies to both the former finance and operating leases and should all be capitalised as an asset.

Of course, I have assumed that your organisation has the right to obtain substantially all the economic benefits from the use of the building and the right to direct the use of the building. If not, then that could change things and perhaps IFRS16 may not apply.

Caspar1

Hello @davealucas,

In light of your last comment above I wondered if you had any wise words regarding the scenario below..........

If a small Ltd company where to take out an operating lease for the Director to have a company car for personal use with very few business miles being made if any. (Although the D/L [which is in credit] would be 'contra'd' against the monthly payments, putting to one side the BIK and additional personal taxation incurred by the Director for the use of a company vehicle and employers NI).

1. In this scenario, how would the Operating Lease and Vehicle be treated in the accounts (would it still be capitalised for the term of the lease)?

2. Would there be any additional disclosures other than the operating lease disclosure?

3. Is there anything to note, in light of the knowledge that the company doesn't really get the economic benefits from the use of it and it is purely a benefit to the employee? (The Directors job is static at the premises and would only use the vehicle to travel from home to work and for pleasure ).

The Director says his low salary/dividends split, means he personally fails the income stream hurdle.

davealucas

@Caspar1 Interesting question.

1. Assuming the vehicle has been leased in the company's name and it is being used for a period of three or more years, I would argue that it is a Finance Lease rather than Operating Lease. That said, under IFRS16, the classification doesn't matter it would be capitalised anyway. Incidentally, FRS 102 (which has not yet caught up with the IFRS - but will probably be brought up to date on the next FRS review) does still separate the classifications.

2. I wouldn't have thought so.

3. In the knowledge that the vehicle is purely of benefit to the Director, then it would clearly be a taxable benefit (I won't go into the taxation itself, I don't have sufficient knowledge). I would have thought, on the face of it, that the Director would probably be more prudent leasing the vehicle in his own name (just my personal opinion rather than a professional one).

Caspar1

@davelucas..... Many thanks for your reply, sometimes its good to have a sounding board and I really appreciate your concise response to this. Seeing as this vehicle would cost the Director far too much in BIK for this proposed 3 years lease. I have tried to highlight to him that this is not a good route to follow, it really does not make sense to do so financially. The main thing I wasn't too sure on was point three (although I am aware of the Benefit in Kind), wasn't sure on any disclosures or notes to the accounts should this arise, other than the Leasing Disclosure.

Thanks again.

accountantemma

Just for clarity, my question was in relation to UK GAAP - not IFRS. Having now had my treatment of this audited (big 4), I can confirm that under FRS102 the legal fees must be expensed as incurred. IFRS16 is not relevant in my scenario.