Company Accounts

Department for Business, Energy and Industrial Strategy written question – answered on 16th September 2020.

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Photo of Baroness Bowles of Berkhamsted Baroness Bowles of Berkhamsted Liberal Democrat

To ask Her Majesty's Government why the International Accounting Standard (1) requires companies to classify and present in their balance sheet property that they rent and do not own as if they owned those assets with the right to sell those assets, and (2) removes rental payments from the profit and loss account and replaces it with a charge for depreciation for assets they do not own and have no right to sell.

Photo of Lord Callanan Lord Callanan Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy)

For many years both UK GAAP and International Accounting Standards have required entities to account for some leases by recognising both the asset utilised by the business and the liability to pay for it on the balance sheet. The asset represents the right to use that asset for the period of the lease, and this ensures the users of accounts can clearly identify the company’s control (exclusive right of use asset) of that property over that time period, intended to reflect where the risks and rewards lie. Recent changes to international accounting standards mean that since 2019 more leases are now recognised on balance sheet by lessees, providing a more complete picture of the financial position of an entity, and greater comparability between entities that borrow to buy assets and those that lease assets. As a result, the profit & loss charge in relation to that leased property includes depreciation of the leased asset as well as an interest expense on the lease liability.

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