Finance Leasing Manual - FLM10.30

Example 1: apportioning the rentals

Having established that the lease in Example 1 at FLM10.26 is a finance lease, it must be accounted for in that way under SSAP21. As described at FLM10.09 it is necessary to split the total rentals into two components, namely-

• an amount representing the 'capital' value of the lessee's rights in the asset, which is treated as an asset and amortised as a fixed asset (paragraphs 12, 32 and 36 of SSAP21)

• the finance charges (the amounts that equate to interest payable under the 'loan').

In Example 1 at FLM10.26 the secondary lease period rentals can be ignored. On the facts it is clear that these are no more than a handling charge to compensate the lessor for any costs of 'holding' the asset. Whether or not subsequent rentals should be ignored will depend on the facts of each case. Ignoring the rentals payable in the secondary lease period the following calculation is made-

Lease rentals (£12,400 x 5 years) £62,000
Amount capitalised
(treated as an asset in the balance sheet) £50,000
-------
Finance charges £12,000