Finance Leasing Manual - FLM25.04

SSAP21 Income recognition for finance leases

As explained at FLM4.14, SSAP 21 requires the 'interest' element in finance lease rentals to be recognised each year 'so as to produce a constant periodic rate of charge on the remaining balance of the [loan] obligation'. This produces a declining amount of net profit ('interest') each year if the lease rentals are structured like a repayment mortgage. Where the rentals payable are the same each year, the gross rent actually due for each period will be more than the SSAP 21 'interest' earnings.

Lessors accept that the tax charge falls on the full amount of the 'interest' they recognise as commercial earnings plus any capital element in the rental. (The capital element in the rental is part of the tax earnings but not part of the commercial earnings-it is a repayment of the 'loan' the lessor has made: see FLM4.10). Tax problems arise where the rentals payable are less than the accountancy earnings. This can happen during the construction period of major assets when no rentals are due or where there are back-loaded (or rising 'stepped') payment terms, see FLM25.09.