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HMRC internal manual

Business Leasing Manual

Taxation of leases that are not long funding leases: sale and leaseback: accounting treatment - accounting standards

The Guidance Notes on SSAP 21 suggest that the situation can be accounted for in one of two ways in the hands of the lessee:

  • under the first method the asset is treated as sold, the profit is amortised over the lease period and the finance lease is accounted for as a separate transaction
  • under the second method the sale and leaseback is regarded as a refinancing exercise by the lessee. The carrying value of the asset remains unchanged and the proceeds should be recorded as a finance lease liability, see BLM35020.

Although both methods are permitted under SSAP 21, Application Note B of FRS 5 requires the second method to be used where the leaseback includes a repurchase option.

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

IAS 17 (paragraph 60) states that if the leaseback is a finance lease, the transaction is a means whereby the lessor provides finance to the lessee, with the asset as security.

IAS 17 states that for this reason it is not appropriate for the lessee to regard an excess of sales proceeds over the carrying amount as income. Instead, such excess is deferred and amortised over the lease term. This treatment is the same as that required by FRS101 and FRS102. This is equivalent to the first method in SSAP 21.