Finance Leasing Manual - FLM4.22

SSAP21: finance lessee's profit and loss account

In addition to showing in its balance sheet the leased asset and the liability to pay the capital element in the rentals (accounted for in the same way as a loan), the finance lessee also has to:

• write off the 'interest' element in the rentals to its profit and loss account in the same way as any interest on a loan (following the same principles as the lessor uses to recognise earnings); and

• depreciate the leased asset in the same way as for assets owned outright; thus, this is real depreciation, not an accounting fiction.

The overall end result in terms of the profit and loss account has not changed for the finance lessee. Before 1984 the lessee deducted the gross lease rentals which, in total, equalled the capital cost of the physical kit (the 'loan') plus the 'interest' on the 'loan'. After 1984 the lessee deducts the 'interest' and depreciation, which is also equal to the capital cost of the kit (the 'loan'). However, after 1984 the timing of the lessee's profit and loss account deductions may be different, see FLM4.23.