The Body Shop International PLC 2004 Annual Report included the following accounting policy:

Leased assets Assets held under finance leases are capitalised at amounts approximating to the present value of the minimum lease payments payable over the term of the lease.The corresponding leasing commitments are shown as amounts payable to the lessor. Depreciation on assets held under finance leases is charged to the profit and loss account.

Leasing payments are analysed between capital and interest components so that the interest element is charged to the profit and loss account over the period of the lease and approximates to a constant proportion of the balances of capital payments outstanding.

All other leases are treated as operating leases with annual rentals charged to the profit and loss account on a straight-line basis over the term of the lease.

(a) Explain the meaning of ‘minimum lease payments’ and ‘approximates to a constant proportion of the balances of capital repayments outstanding.’

(b) Explain why it is necessary to use present values and approximate to a constant proportion.