Paragraph 37 of SSAP 21 says
“The rental under an operating lease should be charged on a straight-line basis over the lease term, even if the payments are not made on such a basis, unless another systematic and rational basis is more appropriate.”
Paragraph 34 of IAS 17 is similar, providing that lease payments under an operating lease
“…are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit, even if the payments are not on that basis.”
This means that, if no payment is made in the first year
(although the asset is in use during that year), the total rentals
should be charged over the term of the lease. Similarly where there
is a high initial payment the total payable should be spread evenly
over the lease term.
If you find out that bases other than straight-line are in
use, please let CT & VAT (Technical) know before accepting
them.
Examples
The lease term is 5 years and £10,000 rentals are
payable on the first day of each of years 2 to 5. The total rentals
of £40,000 should be spread evenly, with £8,000
recognised as an expense each year.
The lease term is 5 years and £20,000 rentals are
payable on the first day of year 1, and £10,000 is payable on
the first day of each of years 2 to 5. The total rentals of
£60,000 should be spread evenly, with £12,000 recognised
as an expense each year.
