BIM61145 - Leasing: Finance lessees: short-term finance leases: no secondary periods

Exceptionally a finance lease may:

• be written for a term which is significantly shorter than the useful economic life of the asset and
• contain no provision for secondary periods and
• provide for rentals over the lease term which allow the lessor fully to recoup in full its expenditure in acquiring the asset plus interest.

In those circumstances it is very likely that a substantial rental rebate will be payable to the lessee out of the sale proceeds of the leased asset. The lessee is not going to pay rentals equivalent to the full cost of buying the asset, plus interest, without securing the right to be paid what the asset is worth at the end of the short lease term.

As the lessee uses up significantly less than the value of the leased asset over the lease term it would be inconsistent with the accruals concept to depreciate the asset in this way.

Restriction of deduction for ‘capital’ element

If the full cost of the leased asset is written off over the lease term in such circumstances, the tax deduction each year for the capital element in the rentals (see BIM61015) should be restricted to a sum equal to the depreciation which would have been charged if a realistic estimate of the likely residual value had been taken into account at the inception of the lease.