The last month of a leasing contract arrives and it's time to decide: do you exercise the purchase option or return the asset? It's a straightforward decision in most cases, but what's worth understanding clearly is what happens to your accounts in each of the two paths, because it's not just about paying, or not paying, one last amount.
If you exercise the purchase option
This is the most common outcome, and accounting-wise it's the simpler of the two: the asset was already on your balance sheet from day one of the contract (that's how leasing works, as we explain in our article on the differences between leasing and renting), so exercising the purchase option doesn't change its accounting nature. What happens is:
- You pay the purchase option amount, which is added to the asset's acquisition cost.
- The outstanding leasing debt is settled to zero.
- The asset keeps depreciating exactly as before, according to its useful life, now as outright property.
There's no «special» transfer entry or change of account: the asset was already yours for accounting purposes from the start, the purchase option simply formalises legal ownership.
If you do NOT exercise the purchase option
It's uncommon — the purchase option is usually a low amount compared with the asset's real value, so it almost never pays to give it up — but it can happen: the asset has become obsolete, you no longer need it, or you'd rather replace it with a new one. In that case:
- The asset is derecognised, along with all the depreciation accumulated up to that point.
- If the outstanding carrying amount (what hadn't yet been depreciated) doesn't match what the asset is actually worth on return, a gain or loss is recorded for the difference.
- The physical asset is returned to the finance company, which may inspect it and charge for wear or damage beyond what's agreed as normal use.
This route usually needs more accounting attention than the first, precisely because you're derecognising an asset that had been on your balance sheet for a while, not just stopping a payment.
A third path: renewing before the end
Some companies negotiate with the finance company to swap the asset for a new one before the original contract ends, especially with vehicles or machinery that fall behind technologically. In practice, this is treated as cancelling the current contract (with its corresponding settlement) and opening a new one, not as a simple extension.
How to know your best option in advance
With a few months' notice before the contract ends, it's worth checking three things: how much is left to pay on the purchase option, what the asset's real market value would be at that point, and whether it still fits your operation or it's already worth replacing. With those three figures, the decision usually makes itself.
Frequently asked questions
Can I decide at the last minute, when the contract ends?
Technically yes, nothing forces you to notify the finance company months in advance, but it's rarely a good idea in practice. If you're going to return the asset, the finance company usually needs to coordinate the collection date, arrange the inspection and, if there's wear beyond normal use, agree on the charge for it — none of which happens instantly. Leaving the decision to the very last day tends to create unnecessary rushing on both sides, and if you're instead planning to exercise the purchase option, deciding early also gives you time to check, as covered above, whether it still makes financial sense compared with the asset's real market value at that point.
Is VAT on the purchase option treated the same as on the instalments?
No, the purchase option amount is treated as its own, independent purchase for VAT purposes, separate from the VAT treatment applied to the regular leasing instalments throughout the contract. The exact rate and any nuances can vary depending on the type of asset involved — a vehicle, industrial machinery, IT equipment — and on specific rules that may apply to your sector, so this is genuinely a point worth checking with your tax adviser case by case rather than assuming it works exactly the same as the instalments you've been posting up to that point.
What if the asset has damage when returned?
If you choose not to exercise the purchase option and return the asset instead, the finance company inspects it as part of the handover and may charge for any wear or damage that goes beyond what the contract defines as normal use for that type of asset. This isn't a penalty in the punitive sense: it's a contractual charge tied to the difference between the asset's condition on return and the condition the finance company expected it to be in, given its age and use. That amount is recorded as an additional expense at the time of return, on top of whatever gain or loss already results from derecognising the asset itself.
In summary
Exercising the purchase option is, almost always, the simpler path: the asset was already yours for accounting purposes and ownership is just formalised. Not exercising it means derecognising the asset and can generate a result that needs to be recorded properly. Either way, deciding with some notice avoids last-minute surprises.
If you have leasing contracts coming up for renewal and want to see it reflected in your ERP before you decide, tell us your case and we'll help you weigh it up.