Finance Leasing Manual - FLM4.14

SSAP21: recognition of lessor's 'interest' earnings

The finance lessor's interest earnings each year are generally found by attributing the total 'interest' lessors get over the whole period of the lease to each accounts year proportionately to the capital outstanding in each period. This produces a declining amount of net profit each year where the rentals are structured like a repayment mortgage. This is because the 'loan' owed by the lessee at the outset gradually reduces. Hence high loan figure in the early years allocates proportionately more 'interest' earnings to those years and vice versa for the later years. The same process applies to the interest the lessor has to pay on his borrowings to fund the lease.