Leases are classified as either:

Finance Lease

• if it transfers substantially all the risks and rewards incidental to ownership
• this includes where an asset is leased for the major part of the economic life of the asset
• gives rise to asset and liability recognition by the lessee

Operating Lease

• if it does not transfers substantially all the risks and rewards incidental to ownership
• gives rise to an expense recognised by the lessee

Please contact your local area finance lead/team in the first instance to assist with the classification, or the central capital team for further guidance.

Indicators of a finance lease include:

• Do we own the asset at the end of the lease?
• Do we have an option to purchase at the end of the lease?
• Can we carry on renting for a reduced rate at the end of the lease?
• Does the present value of lease payments cover most of the cost of the asset?
• Is the asset so specialised only we can use it?
• If the lease is cancelled do we have to pay a penalty which effectively pays for the asset?
• Are we affected by fluctuations in the assets value?
• Do we have to repair/insure the asset?

If several of these can be answered yes, then it is likely to be classed as a finance lease.

The approval process remains consistent with capital and special revenue approvals and is based on the total cost of the lease.

Total Cost of lease = (Annual Cost x length of lease in years) + all Initial Costs + all fixed Costs + all Closure and Scrappage Costs

The workflow attached highlights the approval process, in line with the capital and special revenue approval process, and indicates who should sign the lease.

An example of both an operating lease and a finance lease are given below:

Operating Leases

Finance Leases