A lease and leaseback is almost certainly part of a scheme to
avoid tax, whether the leaseback is an operating lease or a finance
lease.
With effect from 31 December 2001, the IAS accounting
treatment of lease and leaseback transactions is governed by the
provisions of SIC 27 ‘Evaluating the Substance of
Transactions involving the Legal Form of Lease’. The SIC
takes the view that transactions that are linked in such a way that
the effect cannot be understood without reference to the series of
transactions as a whole, should be accounted for as one
transaction. The SIC illustrates the principle by describing a
number of extreme examples. The view taken is that a sequence of
transactions that do not convey the right to use an asset should
not be accounted for as a lease. Therefore, if a party’s
right to use an asset is the same after a series of transactions as
before them, the arrangements will fall outside the scope of IAS
17. Accordingly, the accounting treatment should follow the
substance of the arrangements taken as a whole.
In many respects, the principles underlying SIC 27 are
similar to the general principles set out in UK accounting
standard, FRS 5. However, whilst FRS 5 is concerned with general
principles that affect the interpretation of all types of
arrangements, SIC 27 is concerned with the application of these
principles to the specific circumstances of lease and leaseback
arrangements.
Particular difficulties arise where the head lease involves a
premium.
You should seek advice from your accountant if the accounting
treatment of a lease and leaseback arrangement is material.
