Finance Leasing Manual - FLM25.13

Back loaded leases: commercial reality

Accountants believe it is right for finance lessors to match the recognition of 'interest' income with their interest expenses and so spread the overall net profit over the primary period of the lease in the normal SSAP 21 manner. They say it is unrealistic to recognise merely the physical receipt of cash in any business and this applies to leasing, including these back-loaded leases. A cash basis would mean the finance lessor showed losses in the early years of a lease because of the heavy interest it pays to fund the leased kit. Such losses would be a commercial nonsense and potentially misleading for users of the accounts - and possibly embarrassing for the lessor. The lease is, after all, constructed to be (and generally will be) profitable overall.