Introduction: Lease accounting: Finance lease accounting
In contrast with operating leases, a finance lease is broadly treated as if it were a loan. In essence, for accounting purposes
- the rents are treated as if they were made up of a two elements: one representing interest, the other the repayment of the loan,
- the finance lessor accounts for the deal as if it were a loan and not the purchase and subsequent hire of an asset to a lessee
- the finance lessee, in substance, accounts for the deal as if it were the purchase of an asset with a loan.
It is not easy to find a convenient term to describe the element that represents the repayment of the loan. This manual refers to that element as the ‘capital’ element even though it is part of what are, for tax purposes, revenue receipts. The gross rentals are only split into ‘interest’ and ‘capital’ elements in an economic sense.