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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Lease accounting: finance lease accounting: finance lessors: gross earnings: under IAS17

The method favoured by SSAP 21 is not allowed by FRS102 or IAS 17.

For those UK GAAP entities adopting FRS102, Section 20 paragraph 19 says

“The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease. Lease payments relating to the period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and the unearned finance income. If there is an indication that the estimated unguaranteed residual value used in computing the lessor’s gross investment in the lease has changed significantly, the income allocation over the lease term is revised, and any reduction in respect of amounts accrued is recognised immediately in profit or loss”.

Paragraphs 39 and 40 of IAS 17 require that

“The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease.

A lessor aims to allocate finance income over the lease term on a systematic and rational basis. This income allocation is based on a pattern reflecting a constant periodic return on the lessor’s net investment in the finance lease. Lease payments relating to the period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and the unearned finance income.”

Note that these definition refers to ‘net investment, not ‘net cash investment’, see BLM14030.