Lease accounting: finance lease accounting: finance lessees: profile of charges
The profile of the lessee’s finance charges (the ‘interest element’ of the rentals) over the term of a finance lease where the rental payments in the primary period are constant will be similar to the interest element in repayments of an ordinary domestic mortgage loan. At first, a large proportion of the rentals will be the finance charge (interest in substance) and relatively little will be capital repayment. The finance charge element as a proportion of each rental will fall over the primary period until most of the rental is capital repayment and very little is finance.
The methods used to allocate the interest element of the rents are set out in some detail in the guidance notes to SSAP 21 (starting from paragraph 20) and in various publications. The basic principles are illustrated by Example 1 at BLM15505.