BLM15520 - Lease accounting: finance lease accounting: finance lessees: example 1: allocating the 'interest element' and the 'capital element'
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 example is very simple but even then a lessee will have to have access to computer programs, although excel can be used for this simple example, that allow the effective interest rate method to be used to calculate the interest and capital element of the annual rentals.
Using the effective interest method an effective interest rate of 7.63% can be calculated and this results in a split between the capital element and interest element as shown in the table below.
Year |
Rent (£) less |
Interest element (£) |
= capital element (£) |
|---|---|---|---|
1 |
12,400 |
3,814 |
8,586 |
2 |
12,400 |
3,159 |
9,241 |
3 |
12,400 |
2,454 |
9,946 |
4 |
12,400 |
1,695 |
10,705 |
5 |
12,400 |
878 |
11,522 |