Finance Leasing Manual - FLM4.28

Accountancy treatment of finance leases after 1994

SSAP 21 sets out a largely arithmetical borderline between finance leases and operating leases (for which debt is not shown on the balance sheet), see FLM4.29. The intention was that the SSAP 21 borderline between finance and operating leases would be applied with common-sense and in the light of its spirit, however its spirit was not always adhered to, see FLM4.30. In 1994 the Accounting Standards Board issued FRS 5 (Financial Reporting Standard 5: Reporting the substance of transactions). Of particular relevance is Application Note B on sale and repurchase agreements.

FRS 5 doesn't change the SSAP21 accounts presentation itself where there is a finance lease. What FRS 5 does is to oblige the parties, in appropriate cases, to recognise that they have a finance lease and not an operating lease. When there is a finance lease the parties must follow the SSAP21 presentation outlined at FLM4.21.

There are signs that FRS5 is discouraging abuse. It is public knowledge that some major plcs had to bring a substantial tranche of assets and loans on to the balance sheet because FRS 5 made them treat former operating leases as finance leases.