Finance Leasing Manual - FLM10.26

Lessee accounting: Example 1: basic rental structure

TradCo enters into a lease with BankCo to hire an asset (which TradCo itself identified and had arranged for the finance leasing member of the banking group to buy at a cost of £50,000). The asset is estimated to have a useful life of 20 years. The terms of the lease are-

• rent of £12,400 per annum payable in each year 1-5;

• rent of £25 per annum payable in each year 6-25;

• in the event that the lessee wishes to terminate the lease then, net of any amounts outstanding on the financing arrangements, the lessee will receive a rebate of rentals equivalent to 97% of net sale proceeds.

Issues to consider from an accountancy point of view are:

• whether this is a finance lease, see FLM10.27 onwards

• the apportionment of the rentals between 'interest' and 'capital' elements, see FLM10.30 onwards

• allocating the 'interest element' of the rentals over the lease period, see FLM10.31

• allocating the 'capital element' of the rentals over the lease period, see FLM10.32.