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HMRC internal manual

Business Leasing Manual

Introduction: Leasing: Introduction to accounting standards

The guidance that follows is not intended to give comprehensive coverage of all aspects of lease accounting. The guidance aims to give an overview to allow an understanding of commonly found features in lessors’ and lessees’ accounts. You should initially refer any specific accounting issues not covered in the guidance to your advisory accountant.

There are two acceptable accounting conventions in the UK: UK GAAP and International Financial Reporting Standards (IFRS). For tax purposes, both these standards form part of what is referred to as generally accepted accounting practice (‘GAAP’ - as distinct from ‘UK GAAP’).

In any accounting period beginning before 1 January 2015, if an entity prepares UK GAAP accounts, then its leases will be in accordance with GAAP if it accounts for its leases in accordance with SSAP 21 ‘Leases and hire purchase contracts’, as supplemented by

  • UITF 28 ‘Operating lease incentives’.
  • FRS 5 ‘Reporting the substance of transactions’.
  • The Finance and Leasing Association Statement of Recommended Practice (FLA SORP).

If an entity adopts FRS102 in its UK GAAP accounts, then its leases will be in accordance with GAAP if it accounts for its leases in accordance with Section 20 of FRS 102 “Leases”. Section 20 is not supplemented by any other guidance.

If an entity prepares accounts under IFRS or FRS101, then its leases will be in accordance with GAAP if it accounts for its leases in accordance with IAS 17 ‘Leases’, as supplemented by

  • SIC 15 ‘Operating leases - Incentives’.
  • SIC 27 ‘Evaluating the substance of transactions in the legal form of a lease’.
  • IFRIC 4 ‘Determining whether an arrangement contains a lease’.
  • IFRIC 12 ‘Service concession arrangements’.

For accounting periods beginning before 1 January 2015:

  • the derecognition principles of IAS 39 ‘Financial instruments: Recognition and measurement’ (or IFRS9 ‘Financial Instruments’ for those adopting that standard instead of IAS39)apply to lease receivables and payables
  • and the impairment provisions of IAS39 apply to lease receivables.

For accounting periods beginning on or after 1 January 2015, only IFRS9 will be relevant to derecognition of lease receivables and payables, and impairment of lease receivables.

There is not a great deal of difference between UK GAAP and IFRS. What differences there are, are mentioned in this manual where appropriate.

Lease accounting is introduced at BLM00200 onwards and covered in detail at BLM10000 onwards.