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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 operating leaseback under UK GAAP

If the leaseback is an operating lease, the seller-lessee has disposed of substantially all the risks and rewards of ownership of the asset, and so has realised a profit or loss on the disposal. Therefore both the sale and the lease are usually recognised as such. However the situation can be complicated if the sale is other than at fair value.

Sale at fair value

Where the sale is at fair value any profit or loss should be recognised immediately.

Sale at above fair value

If the sale price is above fair value, the excess over fair value should be deferred and amortised over the shorter of the remainder of the lease term and the period to the next rent review (if any). This has the effect of reducing the rentals payable to a level consistent with the fair value of the asset.

This treatment is followed because the excess will not be genuine profit, but will arise because the operating lease rentals payable under the lease will be at above what might be expected to be the market rate.

An example of this is given at paragraph 157 of the Guidance Notes on SSAP 21.

Sale at below fair value

If the sale price is below fair value because of a bad bargain any profit or loss should be recognised immediately.

Alternatively, the price may be artificially low so as to compensate for future rentals at below market price. The accounting treatment will depend on the previous carrying value and either a profit or loss may arise.

Details of the accounting treatment are set out in paragraphs 159 onwards of the Guidance Notes on SSAP 21.