BLM13005 - Lease accounting: finance lease accounting: rationale
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
The content of this page has been updated and transferred to BLM13010. This page will be archived at the end of February 2026.
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.