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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
Updated
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Introduction: Leasing: Transactions that are treated as leases and leases that are treated as if they are not leases

For accounting periods beginning before 1 January 2015

Under UK GAAP, Financial Reporting Standard 5 Reporting the Substance of Transactions (‘FRS 5’) requires that all transactions are reported in accordance with their substance rather than purely their legal form. It excludes from its scope certain types of transactions, including those dealt with specifically by another SSAP or FRS, such as stand-alone leases within SSAP 21. However, it explains that it covers accounting for lease transactions in accordance with their substance in general terms, and how to interpret SSAP 21 in the context of FRS 5, to ensure that leases are appropriately classified as finance or operating in accordance with their substance.

Consequently it is possible for a transaction that is not a lease to be accounted for as if it were a lease. In addition, it might be argued that FRS 5 (Application Note B, paragraph B20) means that a lease should be accounted for as a loan, for example by the lessee in a sale and finance leaseback, see BLM16000.

For accounting periods beginning on or after 1 January 2015 (earlier adoption permitted)

FRS102 requires that “Transactions and other events and conditions should be accounted for and presented in accordance with their substance and not merely their legal form” (FRS102 Section 2 paragraph 8). FRS102 Section 2 paragraph 14 says that if there are inconsistencies between the concepts and the principles (that are set out in Section 2 of FRS102) and specific requirements of another Section of FRS102, then the “specific requirements of the other Section of the FRS take precedence.

In IFRS and FRS101, international accounting standards require certain transactions that do not take the legal form of a lease to be accounted for as though they were leases. These transactions are governed by IFRIC 4, see BLM10025, and are taxed in the same way as leases. Conversely, international standards can also require certain transactions that do involve the legal form of a lease not to be accounted for as a lease. SIC 27 provides guidance on such transactions.

Under both UK GAAP and IFRS there are pronouncements that apply to Private Finance Initiatives and similar transactions. In UK GAAP these pronouncements are found in FRS 5 Application Note F and in FRS102 Section 34 paragraphs 12 to 16A. In IFRS they are found in IFRIC 12). Where these pronouncements apply the transactions may be accounted for, wholly or in part, under the relevant non-leasing standard.

For accounting periods beginning on or after 1 January 2015, only FRS101 and FRS102 are applicable to UK GAAP.