Finance Leasing Manual - FLM25.01

Back-loaded leases: accountancy treatment

This Chapter is about the way in which finance lessors recognise 'interest' earnings in their commercial accounts before cash has been received, or before cash is due, from a lessee. This happens where there is either:

• a back-loaded or stepped rental payment profile; or

• back-loading with the extra twist that some or all of the finance lessor's money comes at the end in a capital form ('income-into-capital schemes').

The tax treatment of these schemes is now covered by Schedule 12 FA 1997 Part I ('income-into-capital' schemes) and Part II (tax deferral leases) - see FLM27.01 onwards. But it is important to understand the accountancy because Schedule 12 FA 1997 relies on it heavily.

The accounting principles for back loaded finance leases and leases involving capital sums are essentially the same as for other finance leases but the mechanics can be hard to follow. Accountants look at the substance and recognise the 'interest' element in the capital sum regardless of the legal form.

Most of the explanation which follows covers Part II back-loaded finance leasing and not the back-loaded capital sum schemes. However, the accountancy treatment for both is the same.