Finance Leasing Manual - FLM26.18

Negative depreciation

Usually, depreciation is a deduction in arriving at profits but in the example at FLM26.12 there are additions (in Year 1) to bring the rentals due for the year up to the SSAP 21 earnings. Lessors call these additions 'negative depreciation', in contrast to ordinary depreciation which is 'positive'. This is only a matter of presentation which largely derives from the accountancy approach before SSAP 21 was issued in 1984. Negative depreciation, like 'positive depreciation', is simply a balancing entry so that the rentals due plus 'depreciation' equal the 'interest' earnings. The contra entry for depreciation is in the lessee debtor accounts shown in the balance sheet. Negative depreciation increases the balances; positive depreciation reduces them.

The accountancy approach before SSAP21 was to follow the legal form and so the gross earnings were the rentals payable. From those gross earnings the 'loan repayments' were deducted to arrive at the lessor's real earnings from the lease, namely, the 'interest'. Those deductions were called 'depreciation' although they had nothing to do with the actual depreciation of the kit owned by the lessor. After SSAP 21 said that the gross earnings were simply the 'interest', most lessors continued to use the same accounts presentation. When the 'interest' calculated under SSAP 21 exceeded the rents due it was convenient to use the depreciation line to make the mechanical adjustment.