SSAP 21 sets out a principled test that defines a finance
lease, supported by a largely arithmetical test to help define the
borderline between finance leases and operating leases. When SSAP
21 was introduced in 1984 the intention was that the SSAP 21
borderline between finance and operating leases would be applied
with common-sense and in the light of its spirit.
However its spirit was not adhered to by those who wished to
adopt an essentially mechanical approach to the rules, in order to
present the commercial accounts in the best possible light. For
example, if a lessee wanted a lease to be an operating lease it
could structure it so that the present value of the minimum lease
payments amounted to only 89% of the fair value of the asset.
Whether or not the lease was a finance lease then becomes a matter
of professional judgment.
In 1994 the Accounting Standards Board issued Financial
Reporting Standard 5: Reporting the substance of transactions
(‘FRS 5’). Of particular relevance is Application Note
B on sale and repurchase agreements, see
BLM10020.
In particular, FRS 5 may oblige the parties, in appropriate
cases, to recognise that they have a finance lease and not an
operating lease. When there is a finance lease the parties must
follow SSAP 21. Note that FRS 5 doesn't change the SSAP 21 accounts
presentation itself, it just requires certain transactions to be
accounted for as finance leases on the basis that, in substance,
that is what they are.
International Accounting Standards do not contain a separate
standard that is equivalent to FRS 5. However there are rules that
give a similar effect. For example
In practice this means that in most cases a transaction that is treated as a finance lease under UK GAAP is also treated as a finance lease under IFRS.
