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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Lease accounting: finance lease accounting: finance lessees: apportionment of rent

As described at BLM15025 the first step in the accounting process is to apportion rents between

  • the amount representing the lessor’s investment (the cost of the underlying asset - for practical purposes this is described as the ‘capital element’ of the rents), and
  • the amount representing the lessor’s return on its investment (the lessee’s financing costs, described as the finance charge or ‘interest element’ of the rents).

The interest element of the rents can in practice be calculated as the difference between the total rentals payable and the capital element of the rents. Given the nature of a finance lease - akin to a loan - the lessee should know what the asset costs, though estimates can be made if necessary. The assumption made in determining how much of each rental is represented by finance charges is that the lessor’s return (akin to interest) on its investment should be a constant percentage of the sums outstanding under the lease. The logic behind this is that the ‘interest’ charge is directly linked to the amount of the ‘loan’. Therefore the appropriate charge to the profit and loss account for each period is not the amount payable or paid but the amount attributable to the ‘loan’ outstanding in that period.