Finance Leasing Manual - FLM10.17

Methods for apportioning rents: SSAP21

The amount capitalised is treated as an asset in the balance sheet (see FLM10.06). In contrast, the finance charges are normally written off over the primary lease period - as in the case of a loan. The method by which this is done is set out in the Guidance Notes that accompany SSAP21. These state, at paragraph 20-

`The capitalisation of finance leases is now illustrated by means of numerical examples. Three methods of writing off finance charges are shown:

(a) the actuarial method;
(b) the 'Rule of 78' (or 'Sum of the Digits') method, and
(c) the straight-line method.

The standard (paragraph 35) provides that the 'total finance charge under a finance lease should be allocated to accounting periods during the lease term so as to produce a constant periodic rate of charge on the remaining balance of the obligation for each accounting period, or a reasonable approximation thereto'. Of the above three methods, the actuarial method gives the most accurate result.`

The notes that accompany SSAP21 explain how the three methods of writing off finance charges operate. The detail is not repeated here. The object of referring to paragraph 20 of SSAP21 is to draw attention to the fact that there are three different methods and that this is not a wholly mechanical arithmetical process: judgements have to be made. If problems arise in practice you should normally seek accountancy advice.