Finance Leasing Manual - FLM12.90

Part exchange of leased assets

Part exchange of assets is a problem specific to leases. Where assets are part exchanged, an accounting practice is to net off the proceeds of the old asset against the cost of the new asset. If the assets are both owned outright and are both pooled for capital allowances purposes, using the netted off value makes no difference. But it does with finance leases.

Example

• An asset is sold for £200,000 (written down to nil in the books) and replaced by another asset costing £700,000.

• The new asset has a useful life of 10 years and is to be depreciated using the straight line method (10% each year).

• For accounting purposes the figures may be netted off showing net additions of £500,000.

The deduction the lessee ought to get in the first year is £70,000 (£700,000 @ 10%). But by netting off the book profit on the old asset (£200,000) against the cost of a new asset (£700,000), the £200,000 proceeds are not brought in and the lessee effectively writes off £250,000 (£200,000 plus £500,000 @ 10%) in the first year.