BIM61045 - Leasing: General: accountancy treatment: finance lessees

The treatment of the transaction in the accounts of the lessee is complementary to the treatment in the finance lessor’s accounts.

Lessee’s balance sheet

The lessee is in effect regarded as having purchased the asset with the assistance of a loan from the lessor. The cost of the asset is therefore shown in the lessee's balance sheet. It is depreciated by writing off the cost less residual value over the shorter of:

• the lease term, including any secondary period when it is reasonably certain that the lease will not be terminated beforehand, and
• the useful life of the asset.

The balance sheet will also show as a liability what is in effect the loan from the lessor.

Treatment of rentals

The rentals payable by the lessee are split into two streams:

• a `capital' element repaying the `loan' (reducing the liability in the balance sheet), and
• a finance charge or interest element debited to the lessee's profit and loss account.

The finance lease will therefore be reflected in the lessee's profit and loss account through a depreciation charge and a finance charge. Over the term of the lease the total rentals payable will in principle be equal to the sum of the depreciation and finance charges.