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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Lease accounting: leasebacks and sub-leases: sale and finance leaseback under UK GAAP

In a sale and finance leaseback, the seller/lessee has not, in substance, disposed of theasset. Therefore, even though a sale followed by a leaseback in the form of a financelease can result in an apparent profit if the capital value attributed to the asset forthe purposes of the lease is higher than the carrying value of the asset in the books ofthe seller/lessee up to the time of sale, it would be inappropriate to recognise thisprofit.

The Guidance Notes on SSAP 21 suggest that the situation can be dealt with in one of twoways in the accounts of the vendor / lessee:

  • under the first accounting method in SSAP 21 the asset (which is a capital asset of the vendor) is treated as sold and the profit amortised over the shorter of the lease term or useful life of the asset.
  • the second accounting method in SSAP 21 regards the sale and leaseback transaction as a refinancing exercise for the lessee. The carrying value of the asset remains unchanged and the sale proceeds are recorded as a liability.

Where a sale and leaseback falls within the ambit of FRS 5 Application Note B, i.e.where the sale and leaseback includes a repurchase option, then the second method must beapplied. Paragraph B20 of the application note states that no profit should be recognisedon entering into a sale and leaseback arrangement and no adjustment made to the carryingvalue of the asset.

The two methods ultimately have the same impact on profit and loss.

It is important that the principles of FRS 5 are applied by considering all the aspectsand implications of the transaction that are more likely to have commercial effect whendeciding whether a sale and leaseback involves a finance lease or an operating lease.

Further details of the accounting for a sale and finance leaseback are at BLM35000 onwards.