An operating lease is an arrangement to rent an asset – an office, a vehicle, a photocopier – where the company uses the asset but does not take on the risks and rewards of owning it. The rent is charged to the profit and loss account as it is incurred, so the payments still to come under the lease do not appear on the balance sheet. This note discloses them.
What this note shows
The total future minimum lease payments under non-cancellable operating leases at the year end, analysed by when they fall due:
| Editor row | Printed as |
|---|---|
| Operating leases expiring within one year | Within one year |
| Operating leases expiring within 2–5 years | Between two and five years |
| Operating leases expiring after 5 years | More than five years |
Small companies must disclose the total of financial commitments not included in the balance sheet (FRS 102 Section 1A, following SI 2008/409 Schedule 1), and lease commitments are usually the largest part. Presenting them by period, as this note does, is the common approach.
Despite the editor labels, each row is the payments falling due in that period, not the leases expiring in it. A five-year lease with £18,000 annual rent and four years left contributes £18,000 to "within one year" and £54,000 to "between two and five years".
The note is part of FRS 102 Section 1A accounts. In FRS 105 accounts, lease commitments go in the Guarantees and other financial commitments note.
Where the figures come from
The figures are typed in. Work them out from each lease agreement: the rent payable from the day after the year end until the earliest date the company can end the lease without penalty (the non-cancellable period), split into the three time bands. Repeat for last year, or copy last year's closing figures from the prior accounts.
The rent charged in the year is a separate figure: it comes from the trial balance operating lease account and appears as "operating lease charges" in the operating profit note (£18,000 in the demo).
Completing the note in Tax Optimiser
Open the period, choose View Accounts, then Notes in the left Actions menu. Under Operating lease commitments there are two sections.
Operating lease commitments (table)
- Set Show this note in the accounts to Yes.
- Enter the amounts falling due within one year, within two to five years and after five years, for Current Year and Last Year.
Operating lease commitments (text)
The second section, Operating lease commitments, is a text box for an additional sentence – for example what the leases are for, or a summary in words. Switch it on and click Use Template, or type your own. The demo company uses the table only.
Click Save changes to save the note and rebuild the accounts preview.
Wording templates
On the text section, Operating lease commitments:
- Annual commitment under operating leases – states the annual payments the company is committed to and when the leases expire. You are asked for {{AnnualCommitment}} and {{LeaseEndDate}}; the year-end date is filled in for you.
- Total future minimum lease payments – states the total future minimum lease payments in one sentence. You are asked for {{TotalCommitment}}.
How it appears in the accounts
The table section prints "At [year end] the company had commitments under non-cancellable operating leases as follows:", then each row that has a figure in either year, and the total. The text section, if switched on, prints with it.
Frequently asked questions
What is the difference between an operating lease and a finance lease?
Under a finance lease the company takes on substantially all the risks and rewards of owning the asset, so the asset and the lease liability go on the balance sheet. Under an operating lease the company simply rents the asset and discloses future payments in this note.
How do I calculate future minimum lease payments?
For each lease, add up the rent due from the day after the year end to the end of the non-cancellable period (or the first break date), and split it into within one year, two to five years and after five years.
Does the operating lease note come from the trial balance?
No. Future commitments are not in the trial balance, so you type them in. Only the rent charged in the year comes from the trial balance, and that appears in the operating profit note.
Is a property rental with a break clause non-cancellable?
Only up to the break date. Include rent up to the earliest date the company can end the lease without a penalty.
Do micro-entities show operating lease commitments?
FRS 105 accounts disclose the total in the Guarantees and other financial commitments note beneath the balance sheet, rather than in this table.