Finance Leasing Manual - FLM11.29

Lessee's rentals: allocation of finance charge (interest) element

There are a number of commercially acceptable methods of allocating the total finance charge ('interest') element of rentals to each period of account for the purposes of SSAP 21. You should normally accept any method used in the accounts which allocates finance charges in such a way as to give a constant return to the lessor on the total rentals outstanding. You should also accept the use of a straight-line allocation of the finance charges where this method has been used in accordance with the Financial Reporting Standard for Smaller Enterprises (FRSSE). This is covered in more detail at FLM10.17 onwards.