Finance Leasing Manual - FLM12.30

'Full payout' leases: no secondary period

Exceptionally a finance lease may be written

• for a term which is significantly shorter than the useful economic life of the asset and

• containing no provision for secondary periods and

• providing for rentals over the term which allow the lessor to recoup in full his expenditure in acquiring the asset plus interest (a 'full payout' lease).

In those circumstances it is very likely that a substantial rental rebate will be payable out of the sale proceeds of the leased asset. The lessee is unlikely to pay the full cost of the asset plus interest without securing the right to be paid what the asset is worth when it is sold. The lessee therefore uses up significantly less than the value of the leased asset over the lease term. It would be inconsistent with the accruals concept to allow the whole of the non-finance charge element of the rentals over that term.

If the full cost of the leased asset is written off over the lease term in these circumstances the deduction each year for the capital element in the rentals should be restricted to a sum equal to the depreciation which would have been charged if a realistic estimate of the likely residual value had been taken into account at the inception of the lease - see FLM12.22. If necessary you should seek the views of your local accountancy unit on the commercial acceptability of the failure to take into account the residual value of the asset in this way.