IAS 17
1.
International Accounting Standard 17, dealing with leases.
IAS 17 requires finance lease liabilities to be accounted for 'on balance sheet'.
It also requires the appropriate allocation of the total lease instalments between finance charges and reduction of the outstanding lease liability.
2.
Under IAS 17 the total finance charge should be spread in such a way as to produce a constant periodic rate of interest on the remaining balance of the liability.
However, IAS 17 also allows for some form of approximation to be used to simplify the calculation.
Fully accurate calculation bases for spreading the total finance charge include the Actuarial method.
The Sum of the digits method is simpler to apply, and will normally produce a close approximation.
