Finance Leasing Manual - FLM11.23

Lessee's rentals: distinction between SP3/91 and earlier practice

The principal difference between the treatment set out in SP 3/91 and that for earlier finance leases is that for leases to which the Statement of Practice applies rentals should be spread beyond the primary period of the lease where that period is shorter than the useful economic life of the asset.

The change in approach was a response to the growing practice of writing leases with primary periods which were much shorter than the useful life of the asset concerned. The effect of the previous practice was to give relief for the rentals over a much shorter period than that over which the business enjoyed the benefits to be derived from the leased asset. This was contrary to the accruals concept, and to common-sense. In one case a lessee sought to write off over three years the entire cost of an airliner which had a life of twenty years.