BLM15605 - Lease accounting: finance lease accounting: finance lessees: example 2: back-loaded 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 under which it hires an asset (which TradCo itself had identified and had arranged for the bank to buy at cost £50,000). The asset is estimated to have a useful life of 20 years. The terms of the lease are that
- rent of £1,000 per annum is payable in each year 1-3
- rent of £34,000 per annum is payable in each year 4-5
- rent of £50 per annum is 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.
The facts are exactly the same as in Example 1 (see BLM15505),
except that the 'profile' of the rents in the primary lease period is different. And, because the amount borrowed is effectively outstanding for a longer period, this is reflected in larger overall repayments, or rent.
Issues to consider from an accountancy point of view, as with Example 1, are