Lease accounting: finance lease accounting: finance lessees: whether Rule of 78 acceptable
Of all the methods, the Rule of 78 is the one that is most likely to allocate more interest to the first period and the least interest to later periods. It is an unsophisticated, rough and ready, method which is easy to calculate. It is based solely on the length of the loan period and the amount of the interest. It does not take account of all of the factors pertaining to the particular way in which the loan is repaid. It is nonetheless an acceptable method (including for tax purposes) provided that it is used in appropriate circumstances. What the appropriate circumstances are for using the Rule of 78 is essentially a matter of accountancy judgement, on which you would need to seek advice from your advisory accountant.
There may be circumstances where exceptionally the Rule of 78 would not provide an acceptable answer for tax purposes even though it has been used in the accounts and that treatment is acceptable for accountancy purposes on the grounds of materiality. One possible example of this is Example 2 at BLM15605 onwards and BLM15620 in particular. Where the tax involved is significant, you should refer any cases of difficulty to CTIS (CT&BIT).