BLM14010 - Lease accounting: finance lease accounting: finance lessors: finance income
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
A finance lessor's commercial income (the ‘gross earnings’) shown by its accounts is merely the ‘interest' on the ’loan' (as in the case of any lender).
FRS 102 Section 20.19 sets out the method for the subsequent measurement of finance leases by the lessor:
“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”.