Example
In the example at
BLM71301 the lessor (Bank) accounts for
the transaction as a finance lease. The option is likely to be
exercised because Bank will charge Borrower more if it gets its
money back in taxable form (as rents) rather than as a capital sum
which escapes tax. So Bank will get back its 'loan' with
'interest'. Accounting standards therefore require the excess of
option proceeds over the cost of the property (£100m -
£70m = £30m) to be included in income annually. It is
'interest' and will be spread using the normal accountancy
approach; that is, in proportion to the debt outstanding each year,
see
BLM14000 onwards.
This means that over the 7 year period 'interest' of
£70m will be recognised as income. Bank's expenses
(Bank’s funding costs) over the 7 year period total £63m
(£9m x 7 years). So there is a net overall commercial profit
of £7 million. The profit and loss account comes down to:
In £millions
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Total |
| Option excess | 0 | 4 | 4 | 4 | 4 | 4 | 5 | 5 | 30 |
| Rent | 0 | 3 | 4 | 5 | 6 | 7 | 7 | 8 | 40 |
| Total income | 0 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 70 |
| Expense | 0 | -6 | -7 | -8 | -9 | -10 | -11 | -12 | -63 |
| Profit/(Loss) | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 7 |
