Taxation of leases that are not long funding leases: finance lessees: importance of lease term: no secondary period: primary period equates to useful life of asset
If the ‘loan’ is being repaid over the full useful life of the asset the accounting and tax treatment should be fairly straight forward - since the primary lease period equates to the useful life of the asset, the rentals are still spread over the useful life as for a ‘normal’ finance lease.
This sort of lease does not protect the lessor’s interests very well and may only be available to lessees for whom security is not regarded as a problem: for example blue chip companies or companies backed by government or local authorities. Conversely, like an ordinary lender advancing funds on the security of an asset that the borrower intends to purchase, there comes a point where a finance lessor would consider a prospective customer too likely to default on his obligations to make the transaction worthwhile, however good a security the leased asset represents.
But there will be many cases between these two extremes where lessors will normally wish to ensure that the residual value of the asset is significantly more than the outstanding lease repayments. That margin is not available where the loan is not repaid until the end of the asset’s useful life.
In practice, if the leased asset has a relatively short life the residual value at the end of the primary term of lease may be so small that depreciation of the full cost of the asset over the primary term of the lease is appropriate on the grounds of materiality.