Finance Leasing Manual - FLM4.15

SSAP21: lessor's 'interest' recognition principles

SSAP 21 expresses the 'interest' recognition principles as follows:

'For the purposes of profit recognition . . . the total gross earnings [ie the 'interest' receivable] should be allocated to accounting periods to give a constant periodic rate return on the lessor's net cash investment.'

(Paragraph 35 of SSAP 21 and further explained in paragraph 20 of the Notes on the Standard.)

Translated this simply means that you spread the gross earnings ('interest') so that the lessor earns the same percentage rate in each period on the capital he has invested in that period. The result will be different where the 'interest' rates are variable but that is only a minor complication of the general principle.