BLM15540 - Lease accounting: finance lease accounting: finance lessees: example 1: lease terminated early
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.
Consider the possibility that the lessee no longer wants to use the leased asset at the end of the fourth year. The lessee terminates the lease. It is then required to be sold to an unconnected party. Assume that in this example the sale takes place on the first day of year 5 for £42,000. At that point the lessee still 'owes' £11,522 (BLM15535). Repayment of that will be the first charge on any sale proceeds.
The premature repayment will also cause the terms of the loan to be revisited. The rate of interest charged under a loan normally bears some relation to the period of the loan. Assuming this is a variable rate loan (normally tied to LIBOR), shorter loans tend to bear marginally higher rates. The premature termination may therefore increase the rate. The repayment might cost (say) £12,000 (including £478 extra interest).
The accounting entries are set out at BLM15545.