BLM15505 - Lease accounting: finance lease accounting: finance lessees: example 1: basic rental structure

TradCo enters into a lease with BankCo to hire an asset (which TradCo itself identified and had arranged for the finance leasing member of the banking group to buy at a cost of £50,000). The asset is estimated to have a useful life of 20 years. The terms of the lease are:

• rent of £12,400 per annum payable in each year 1-5;
• rent of £25 per annum 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.

Issues to consider from an accountancy point of view are:

• whether this is a finance lease, see BLM15510 onwards
• the apportionment of the rentals between ‘interest’ and ‘capital’ elements, see BLM15515
• allocating the rentals between the ‘interest element’ and ‘capital element’ over the lease period, see BLM15520