BIM61160 - Leasing: Finance lessees: change in depreciation rate under SSAP 21

If, during the term of a lease, there is a change in the rate at which a leased asset is depreciated and the revised view of the life of the asset can be justified, then the allocation of the rentals from the year of change onwards should reflect the revision. Thus, if on SSAP 21 accounting the depreciation charge is increased, the rentals allocated to the periods affected will also be increased.

Exceptionally, the assets may have retained their value (or even increased in value) and the change of view is sufficiently radical to cause depreciation for earlier periods to be written back to the profit and loss account (that is, treated as income of the current period). Such a credit should be regarded as a taxable receipt in the year of the adjustment. Similarly a current year deduction would be available for additional depreciation treated - exceptionally - as a prior year adjustment in the accounts.

Lease reclassified

In the same way, where a lease which has previously been regarded as an operating lease is subsequently treated as if it were a finance lease in accordance with FRS 5 (see BIM61030), the prior year adjustment needed to make the transition should be taken into account for tax as a revenue item for the current period of account.