BLM15510 - Lease accounting: finance lease accounting: finance lessees: example 1: is this a finance lease?
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.
The lease in Example 1 at BLM15505 is a finance lease as it is evident substantially all the risks and rewards incidental to ownership of the asset have been transferred.
The rental terms (or repayment terms to give the transaction its true commercial meaning) are a crucial feature in this example. It is normally only possible to appreciate this by looking at all the terms of the agreement. For example there may be provisions specifying the implied interest rate. As in this example, there will also be provisions for terminal rentals and terminal rebates if the asset is sold. In the case of a finance lease the broad effect of such provisions is that the risks and rewards of ownership rest with the lessee – which is what makes the lease a finance lease, see BLM11200.