BIM56410 - Film and audio products: tax deferral schemes for qualifying films: accountancy treatment

This page describes what you might expect to see in the accounts of the lessor in a sale and leaseback scheme. It is important to note that film sale and leaseback schemes are an area where the tax treatment will normally differ substantially from the accountancy treatment.

The generally accepted accounting practice in the UK for lease transactions is contained in SSAP21 - ‘Accounting for leases and hire purchase contracts’.

SSAP21 involves a decision as to whether or not a lease meets the given definition of a finance lease. If it does not meet that definition it is an operating lease. A finance lease is defined as ‘a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee’.

Sale and leaseback transactions involving the master versions of films are generally finance leases.

Where a finance lease exists, the lessee will recognise the asset that is the subject of the lease as a fixed capital asset. This asset is depreciated on a similar basis to owned assets. The corresponding rental obligations under the lease are recognised as a liability on the balance sheet. This liability is reduced as the rental obligations under the lease are met.

The lessor under a finance lease does not recognise the asset itself on its balance sheet. Instead it recognises a financial asset. The lessor must calculate the gross earnings from the lease and allocate these sums to give a constant periodic rate of return on the lessor’s net cash investment in the asset.

If, exceptionally, the lease is an operating lease, SSAP21 requires the lease rentals to be charged to the profit and loss account of the lessee on a straight line basis over the term of the lease.

The lessor with an operating lease should recognise the rentals receivable on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which the benefit from the leased assets is receivable.