Lease transactions

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I am working for a client who buys specialised equipment to hire out to another company. There is no option for the other company to buy the equipment. I believe it is classified as a finance lease as the total amount repayable on the lease (not including interest) is equal to the purchase price, the equipment will be leased for the entirety of it's useful life and the lessee is responsible for maintenance and repairs. Once the rental term has expired the lessee is charged a nominal amount per year of £1.

I believe that I should be posting the 'net investment in the lease' as a debtor instead of fixed assets. The income would simply be the interest portion of repayments. The client uses Xero and I am unsure how to post the transactions to reconcile against the incoming monthly amount from the lessee - should I be posting an invoice to their account each month reducing the net lease value by the repayment portion and posting the interest portion to income? Any help would be appreciated - I have only dealt with transactions on the lessee side before

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By paul.benny
15th Jun 2024 15:32

I'd start by looking at FRS102, which does set out reasonably clearly accounting by lessors. It can be downloaded without charge from the FRC website. If you're still unclear after studying the standard, come back with your specific problems.

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Replying to paul.benny:
By MamaBear
17th Jun 2024 23:50

Looking at FRS 102 I do believe this to be a finance lease and as such I should recognise the net investment as a receivable.

In terms of recognition of finance income it states that it should be 'based on a pattern reflecting a constant periodic rate of return on the net investment'. My question is how should I apportion the monthly payment due between interest income and reduction of net investment.

Should I be calculating the implicit rate in the agreement (IRR calculation) to then work out the interest portion each month (resulting in a larger proportion of the monthly instalment being interest income at the beginning of the lease and a larger proportion being capital towards the end of the lease)

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