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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: finance lessees: commercial substance

As with finance lessors, the accounting treatment by finance lessees reflects the commercial substance of the transaction and a finance lease is accounted for in much the same way as a loan. 

As explained at BLM00620 a finance lease normally consists of two distinct periods: a ‘primary’ period, and a ‘secondary’ period. The ‘loan’ (with ‘interest’) is repaid during the primary lease period. Once that period is over the lessee usually has the option to continue to hire the asset for a nominal rent during the secondary lease period (or periods), either indefinitely or for at least the remaining useful life of the asset.

This part of the guidance outlines the principles that underpin the accounting practice, and illustrates these through two practical examples:

  • Example 1 shows how the principles are converted into practice, as well as showing what typically happens if the underlying asset is sold - see BLM15505 onwards;
  • Example 2 considers the peculiar features of a lease where the primary period rentals are uneven - see BLM15600 onwards.