Usually, depreciation is a deduction in arriving at profits
but in the example at
BLM70035 there are additions (in Year 1)
to bring the rentals due for the year up to the GAAP earnings.
Lessors call these additions 'negative depreciation', in contrast
to ordinary depreciation which is 'positive'. This is only a matter
of presentation which largely derives from the accountancy approach
before SSAP 21 was issued in 1984. Negative depreciation, like
'positive depreciation', is simply a balancing entry so that the
rentals due plus 'depreciation' equal the 'interest' earnings. The
contra entry for depreciation is in the lessee debtor accounts
shown in the balance sheet. Negative depreciation increases the
balances; positive depreciation reduces them.
The accountancy approach before SSAP21 was to follow the
legal form and so the gross earnings were the rentals payable. From
those gross earnings the 'loan repayments' were deducted to arrive
at the lessor's real earnings from the lease, namely, the
'interest'. Those deductions were called 'depreciation' although
they had nothing to do with the actual depreciation of the asset
owned by the lessor. After SSAP 21 said that the gross earnings
were simply the 'interest', most lessors continued to use the same
accounts presentation. When the 'interest' calculated under SSAP 21
exceeded the rents due it was convenient to use the depreciation
line to make the mechanical adjustment.
