Finance Leasing Manual - FLM12.37

Rentals wholly written off over short primary period: example

Consider the following simplified example:

• an asset which has a cash cost of £300,000 has a life of ten years;

• the trader leases the asset over a primary period of five years in which rentals (excluding the finance charge element) of £60,000 a year are payable;

• the lessee has the right to continue to lease the asset for as long he likes after the primary period on payment of £10 (ten pounds) a year;

• after five years the asset is worth £150,000.

On these facts the £300,000 capital cost of the asset will be consumed over ten years. This produces a depreciation charge of £30,000 each year the asset is held, whether it is held for ten years or whether it is going to be sold when the primary period ends. If the asset is kept for its ten year life, there will simply be depreciation charges of £30,000 a year for ten years. If the asset is sold after five years, the residual value at the five year point will be £150,000 and so the net amount to be written off is £150,000 (£300,000 less £150,000) over the five year period (£30,000 a year).