Finance Leasing Manual - FLM29.03

Income-into-capital scheme: accountancy treatment: detail

In the example at FLM29.01 the lessor (Bank) accounts for the transaction as a finance lease. The option is likely to be exercised because Bank will charge Borrower more if it gets its money back in taxable form (as rents) rather than as a capital sum which escapes tax. So Bank will get back its 'loan' with 'interest'. Accounting standards therefore require the excess of option proceeds over the cost of the property (£30m) to be included in income annually. It is 'interest' and will be spread using the normal SSAP 21 approach; that is, in proportion to the debt outstanding each year, see FLM4.21.

This means that over the 7 year period 'interest' of £70m will be recognised as income. Bank's expenses over the 7 year period total £63m (£9 x 7 years). So there is a net overall commercial profit of £7 million.

The profit and loss account