Finance Leasing Manual - FLM10.51

Example 2: loaded rental structure

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

• rent of £1,000 per annum payable in each year 1-3;

• rent of £31,000 per annum payable in each year 4-5;

• rent of £50 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.

The facts are exactly the same as in Example 1 (see FLM10.26), except that the 'profile' of the rents in the primary lease period is different. And, because the amount borrowed is effectively outstanding for a longer period, this is reflected in larger overall repayments, or rent.

Issues to consider from an accountancy point of view, as with Example 1, are:

• the apportionment of the rentals between 'interest' and 'capital' elements, see FLM10.54

• allocating the 'interest element' of the rentals over the lease period, see FLM10.55 (Rule of 78) and FLM10.63 (straight-line method).