Finance Leasing Manual - FLM25.09

Back-loaded leases: accountancy treatment

SSAP 21 requires the lessor to recognise the total 'interest' earnings in the rentals proportionately to the 'loan' outstanding each year. The 'loan' for a back-loaded finance lease therefore rises during the early years of the lease because the 'interest' due is not paid or nor wholly paid. The 'interest' compounds up. So the 'interest' earnings will rise as the lease goes on until the rents payable rise sufficiently to catch up (or, in 'income-into-capital' schemes, the capital sum is paid). The borrowings the finance lessor uses to fund the lease will also rise and so the net commercial profit remains roughly the same.