The general principle behind FRS 5 is that an entity should
report the substance of the transactions into which it has entered.
In doing so, all the aspects and implications of the transactions
should be identified and greater weight given to those more likely
to have a commercial effect in practice. These principles are
relevant in ensuring that leases are classified as finance or
operating leases in accordance with their substance.
The application notes provide guidance on how to apply the
requirements of FRS 5 to transactions with certain features.
Application Note B to FRS 5 provides specific guidance on the
accounting of sale and repurchase agreements under UK GAAP.
The repurchase arrangements may involve a finance lease with
an option for the lessee to purchase the leased asset.
In general, the effect of Application Note B is to confirm
that where the substance of a sale and leaseback is in effect a
financing arrangement, in accordance with the Guidance Notes on
SSAP 21, the lessee in a sale and finance leaseback should classify
the transaction as a finance lease, continue to recognise the asset
and account for the transaction as a finance lease.
