Client a freight company bought couple of trucks on Hire Purchase. This compelled a visit to FRS 105 (Client Company being a micro entity).
First step in lease accounting is classification of lease either as operating or finance lease. Hire purchase is clearly a finance lease. So we move forward.
Lease classiﬁcation is made at the inception of the lease and is not changed during the term of the lease unless the lessee and the lessor agree to change the provisions of the lease (other than simply by renewing the lease), in which case the lease classiﬁcation shall be re-evaluated.
Now to bookkeeping:
Recognized as an asset and liability.
A lessee shall apportion lease payments between interest (PL) and principal (BS).
A lessee shall also depreciate the asset.
If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.
Now we turn to our case.
I wrote a long blog but then found a better example. See link below: