Understanding Finance and Operating Leases in Academy Trusts: Clarification in the Academies Accounts Direction 2024/25

Finance Leases

Under FRS 102 Section 20 (Leases), a finance lease effectively transfers the risks and rewards of ownership to the Academy Trust and must be recorded on the balance sheet as both an asset and a liability.

Effects on the Balance Sheet

• IT equipment acquired through a finance lease is recognised as a Right-of-Use (ROU) asset, meaning the school can use the equipment as if it owns it, even though it is still making lease payments..
• A corresponding lease liability is recorded on the Balance Sheet.
• Interest expenses are recognised in the Trust’s Profit & Loss.
• Depreciation of the asset is recorded as an expense.

While finance leases provide long-term control over IT assets, they also increase balance sheet liabilities.

Operating Leases

With an Operating lease the risks and rewards of ownership remain with the lessor. The lease does not appear on the Balance Sheet as a liability and the rentals are accounted for as an expense through the Profit & Loss Account.

Effects on the Balance Sheet

• Operating Leases do not appear as an asset or liability.
• Lease payments are recorded as operating expenses, and so do not directly affect the balance sheet.

The other key consideration when selecting the right solution for an Academy Trust is ensuring best value for money.

The Schools Financial Value Standard (SFVS) 2025, published by the Department for Education (DfE), mandates that Academy Trusts demonstrate best value for money in procurement decisions, balancing affordability with educational needs. When evaluating lease options for IT equipment, Trusts should consider:

• Total Cost of Ownership (TCO) – Assessing all long-term costs, including maintenance and upgrades.
• Procurement Compliance – Ensuring lease agreements align with best procurement practices and regulatory requirements set out in the Academy Trust Handbook.
• Financial Flexibility – Operating leases may offer cost-efficiency and flexibility, while finance leases provide greater options for assets held for a longer term.
• Technology Refresh Strategies – Aligning lease terms with technology cycles to avoid obsolescence.

The Academies Accounts Direction 2024/25 states that all Academy Trusts must prepare their financial statements in accordance with FRS 102 when classifying and reporting finance and operating leases with finance leases recorded on the balance sheet as a liability and operating leases treated as an operating expense.

Sitting on all public sector frameworks, including the DfE signposted CPC and Crown Commercial Services frameworks for leasing, CHG-MERIDIAN can provide expert guidance on leasing  to ensure compliance with financial sustainability and best value for money.