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HMRC internal manual

Business Leasing Manual

HM Revenue & Customs
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Lease accounting: accounting standards: FRS 5 Application Note B, Sale and repurchase agreements

The general principle behind FRS 5 is that an entity should report the substance of the transactions into which it has entered. In doing so, all the aspects and implications of the transactions should be identified and greater weight given to those more likely to have a commercial effect in practice. These principles are relevant in ensuring that leases are classified as finance or operating leases in accordance with their substance.

The application notes provide guidance on how to apply the requirements of FRS 5 to transactions with certain features.

Application Note B to FRS 5 provides specific guidance on the accounting of sale and repurchase agreements under UK GAAP.

The repurchase arrangements may involve a finance lease with an option for the lessee to purchase the leased asset.

In general, the effect of Application Note B is to confirm that where the substance of a sale and leaseback is in effect a financing arrangement, in accordance with the Guidance Notes on SSAP 21, the lessee in a sale and finance leaseback should classify the transaction as a finance lease, continue to recognise the asset and account for the transaction as a finance lease.