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HMRC internal manual

Business Leasing Manual

Lease accounting: finance lease accounting: finance lessors: difference in income recognition between UK GAAP and IFRS

Under SSAP21 a finance lessor’s income gives a constant periodic rate of return on the lessor’s net cash investment in the finance lease.

Under FRS102 and IFRS (and FRS101) a finance lessor’s income gives a constant periodic rate of return on the lessor’s net investment in the finance lease.

The principal difference between the net cash investment method and the net investment method is the treatment of tax cash flows, which are taken into account by the net cash investment method but ignored under the net investment method. Accordingly the differences between the methods vary according to the significance of the tax deferral effects of a lease.

For this reason a lessor’s net cash investment is usually less than a lessor’s net investment. Therefore, assuming identical finance leases, a lessor reporting under SSAP21 is likely to recognise more income in the early years of the lease than a lessor reporting under FRS102 and IFRS (and FRS101). Over the full period of the lease the total income reported will be the same.