Lease accounting: finance lease accounting: rationale
SSAP 21, supported by FRS 5, and IAS 17 were brought in to address the problem of what is commonly referred to as ‘off balance sheet financing’. One of the main aims of such arrangements is to finance a business’s assets and operations in such a way that the finance is not shown as a liability in the business’s balance sheet. A further effect is that the assets being financed are excluded from the accounts, with the result that both the resources of the entity and its financing are understated.
Therefore, following SSAP 21, FRS 102 and IAS 17 (and FRS101), accountants look at the commercial reality and treat a finance lease much as if it were a loan by a lessor to a lessee which the lessee uses to buy the asset. That is, the accounting follows the substance of the transaction rather than its legal form.