The Tesco 201 I Annual Report included the following accounting policy:

Assets held under finance leases are recognised as assets ofthe Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the Group Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and a reduction of the lease obliga¬ tions so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Group Income Statement. Rentals payable under operating leases are charged to the Group Income Statement on a straight-line basis over the term of the lease.

Rental income from operating leases is recognised on a straight-line basis over the term ofthe lease.

(a) Explain the meaning of ‘minimum lease payments and fair value'.

(b) Explain why fair value might be higher than the discounted minimum lease payments.

(c) Explain why the aim is to arrive at a constant rate of interest.(appendix)