BLM00030 - Introduction: Leasing: Transactions that are treated as leases and leases that are treated as if they are not leases

FRS 102 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” (FRS 102 Section 2.8). FRS 102 Section 2.1A says that if there are inconsistencies between the concepts and the principles (that are set out in Section 2 of FRS 102) and specific requirements of another Section of FRS 102, then the “specific requirements of the other Section of the FRS take precedence.

FRS 102 Sections 20.3 and 20.3A confirm that determining whether or not an arrangement is, or contains, a lease is based on the substance of the arrangement. These sections provide examples of such situations and factors to consider when making the assessment.

As explained in BLM00025 IFRS 16 requires assessment of whether a contract is, or contains a lease. IFRS 16 includes Application guidance to assist with the lease assessment for more complicated scenarios. IFRS 16 Illustrative Examples 1 – 10 also illustrate how an entity might apply some of the requirements of IFRS 16 to particular aspects of a lease (or other contracts).

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 102 Section 34.12-16A. 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.