Front-end loading
There will be occasions where it is not appropriate to allow the rentals in accordance with the lease as in so doing, they will offend the accruals concept severely.
An example will be an expensive asset with a long life (say > 10 years) which is ‘paid’ for over a primary period of say 2 to 4 years. In such cases the accounts inspector and the agent will need to agree an appropriate spreading forward of the lease payments.
Non-depreciating assets
If a finance lease is utilised to acquire an asset that will not depreciate over the period of use in the trade then the residual value will be either equal to or greater than ‘cost’ at the end of the period.
By applying the accruals (matching) concept it will be appropriate in these circumstances to allow the interest element on the lease only.
Leasing fixtures
As a matter of general law it is not possible for a fixture to be leased by anyone other than the freeholder. This is because an asset is leased when the owner (the lessor) hires it out to the user but does not transfer title.
A fixture will normally belong to the freeholder of the real property to which it is attached and the freeholder will not normally be the finance lessor. In these cases, in order to remain equitable, allow the lease rentals on the fixture only if the asset concerned is plant and machinery, and subject to the guidelines above (ie allow lease rentals for eg air conditioning, but not for windows).
In these cases it will be most appropriate to spread the leasing payments over the expected economic life of the asset in order to minimise problems on the subsequent sale of the building. Apply the same rules to fixtures acquired by the tenant of a building also.
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