BLM15505 - Lease accounting: finance lease accounting: finance lessees: example 1: basic rental structure

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

TradCo enters into a lease with BankCo to hire an asset (which TradCo itself identified and had arranged for the finance leasing member of the banking group to buy at a cost of £50,000).  The asset is estimated to have a useful life of 20 years.  The terms of the lease are:

  • rent of £12,400 per annum payable in each year 1-5;
  • rent of £25 per annum payable in each year 6-25;
  • in the event that the lessee wishes to terminate the lease then, net of any amounts outstanding on the financing arrangements, the lessee will receive a rebate of rentals equivalent to 97% of net sale proceeds.

Issues to consider from an accountancy point of view are:

  • whether this is a finance lease, see BLM15510 onwards
  • the apportionment of the rentals between 'interest' and 'capital' elements, see BLM15515 
  • allocating the rentals between the 'interest element' and ‘capital element’ over the lease period, see BLM15520