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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
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Lease accounting: finance lease accounting: finance lessors: commercial substance and net investment in lease

A finance lessor’s accounts show no physical asset in its balance sheet even though it owns the leased asset.

Instead a finance lessor has to record the amount due from the lessee under a finance lease in his balance sheet as a debtor at the amount of the net investment in the lease (SSAP 21 paragraph 38, FRS102 Section 20 paragraph17, IAS 17 paragraph 36). This figure is the one that can be envisaged as the amount of the loan.

SSAP 21 (paragraph 22) defines the net investment in a lease at a point in time as comprising

  1. the gross investment in a lease; less
  2. gross earnings allocated to future periods (SSAP 21, paragraph 22).

For those entities adopting FRS102, the net investment in a lease is defined as the gross investment in a lease discounted at the interest rate implicit in the lease.

IAS 17 (paragraph 4) also defines the net investment in a lease as the gross investment in the lease discounted at the interest rate implicit in the lease.

The meaning of the three definitions is essentially the same.

In both FRS102 and IAS 17 the gross investment in a lease at a point in time is the total of the minimum lease payments and any unguaranteed residual value accruing to the lessor. The minimum lease payments are defined in BLM11010.