As you may be aware there are two types of leases; operating and finance. Sounds simple right?
In principle it is, operating leases are allowed by the ESFA but finance leases are not as they are deemed to be a type of borrowing.
However we are seeing more and more Academies enter into a finance lease without ESFA approval because they haven’t carried out thorough checks to ensure they are on the right side of the Financial Handbook.
So what’s the difference?
- Rental payments as part of an operating lease will only pay a proportion of the value it would cost to buy the asset outright over an agreed term.
- The length of the agreement should not be longer than useful economic life of the asset.
- At the end of the agreed lease term you will not own the equipment and academy will have to return it.
- The academy has the right to use the asset for most or all of its useful economic life.
- It is the academy’s responsibility to insure, maintain and repair the asset.
- The academy may still not own the equipment at the end of the agreement unless the agreement transfers ownership by the end of the lease.
- The academy may have the option to purchase the asset at a price expected to be significantly lower than the fair value at the date of the option to purchase.
What if you’re still not sure?
First of all you must make sure you are fully aware of all the conditions in the agreement and understand all the costs associated to the lease before signing it. This is important as some agreements offered can make it difficult to determine whether or not your academy is entering into an operating lease or a finance lease, even going to the extent of calling it an operating lease despite it having the characteristics of a finance lease.
If after examining the document carefully you are still unsure please come to us. We will be able to take the time to calculate and advise whether the lease payments and the term length seem appropriate for an operating lease.
This review can also help you decide whether it is good value for money to go ahead with the contract. We often see cases where academies are actually paying more to lease the asset (especially computer equipment) over a few years than it would have cost to buy outright. If you have the cash available, it is often better to buy the equipment and save money in the long run.
Once the outcome has been determined and the agreement suggests it is a finance lease, you may feel that this is the only viable option for you. If that is the case you must ensure that you contact the ESFA before entering into the contract to obtain approval. Failure to do so may lead to a warning of a financial notice to improve.
If you have any further queries on this topic or anything academy related please do not hesitate to contact a member of our specialist team.