Finance Leasing Manual - FLM11.49

No secondary lease period: where primary period equates to useful life of asset

If the 'loan' is being repaid over the full useful life of the asset the accounting and tax treatment should be fairly straight forward - since the primary lease period equates to the useful life of the asset, the rentals are still spread over the useful life as for a 'normal' finance lease.

However such cases are relatively unusual. This sort of lease does not protect the lessor's interests very well and so is normally only available to lessees for whom security is not regarded as a problem : for example blue chip companies, or companies backed by government or local authorities. Conversely, like an ordinary lender advancing funds on the security of an asset that the borrower intends to purchase, there comes a point where a finance lessor would consider a prospective customer too likely to default on his obligations to make the transaction worthwhile, however good a security the leased asset represents.

But there will be many cases between these two extremes where lessors will normally wish to ensure that the residual value of the asset is significantly more than the outstanding lease repayments. That margin is not available where the loan is not repaid until the end of the asset's useful life.