Finance Leasing Manual - FLM12.19

No secondary period: lessee not using asset for its full useful life

Where the lessee enjoys the rewards of economic ownership of the asset, but does not intend to use it for its full useful life, the treatment will be particularly dependent on the facts. But the general expectation is that the amount of rents expended in any year should bear some relation to the proportion of the value of the asset/rents used up in that year. How this is achieved may vary from case to case.

For example, if the leased asset has a useful life of 10 years, the lease runs for five years, with an optional five year extension, and the net present value of the lease rentals over the five years represent 50% of the cost of the leased asset, the treatment is likely to be fairly straightforward. The rents paid over the first 5 years match the expected diminution in value of the asset.

If however, the net present value of the rents paid over the five years represent significantly more than 50% of the cost, then one would not expect the full amount of the rents to be written off. Either the treatment should recognise the likelihood that the asset will carry on being used thereafter, or that some part of the rent will be repaid when the asset is sold.