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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: finance lessees: example 1: apportioning the rentals

Having established that the lease in this example is a finance lease, it must be accounted for in that way under GAAP. As described at BLM13000 onwards it is necessary to split the total rentals into two components, namely

  • an amount representing the ‘capital’ value of the lessee’s rights in the asset, which is treated as an asset and depreciated as a fixed asset
  • the finance charges (the amounts that equate to interest payable under the ‘loan’).

In this example the secondary lease period rentals can be ignored. On the facts it is clear that these are no more than a handling charge to compensate the lessor for any costs of ‘holding’ the asset. Whether or not rentals payable in a secondary period should be ignored will depend on the facts of each case. Ignoring the rentals payable in the secondary period the following calculation is made:

Lease rentals (£12,400 x 5 years) £62,000
Amount capitalised (treated as an asset in the balance sheet) £50,000
Finance charges £12,000