BLM20210 - Defining long funding leases: the three tests: the finance lease test: CAA01/S70N

The finance lease test is met if under GAAP ( BLM20215)

• the lease is or should be accounted for as a finance lease or loan in the accounts of the person to whom the decision applies (lessor or lessee, as appropriate), or
• in the case of a lessor, the lease is or should be accounted for as a finance lease or loan in the accounts of anyone connected with the lessor, including in the consolidated accounts, see BLM20220.

Note that a lease meets the finance lease test if it is, or under GAAP should be, accounted for as a finance lease or loan by a connected party, even if it is not accounted for as a finance lease or loan by the lessor.

At present, it is probable that the only time a plant or machinery lease could be argued to be accounted for as a loan is

• by the lessee, and possibly by the lessor, in a lease and finance leaseback or sale and finance leaseback (where the accounting applies throughout the life of the arrangement) see BLM16010 and BLM16015
• in the case of both the lessor and the lessee where payments are made between inception of a lease and its commencement. (The arrangement will be accounted for as a lease after commencement, even if it is not before commencement).

Even in some of these cases, particularly in the case of a sale and finance leaseback, it is probable that the correct accounting treatment is ‘as a lease’. In any event, it is probable that all other plant or machinery leases are accounted for as a lease ( BLM20130). However, accounting standards – and the transactions to which they apply – are continually developing and often becoming more complex. As a consequence it is not possible to give comprehensive guidance, particularly where it is appropriate to apply FRS 5 Reporting the Substance of Transactions. Always bear in mind that the legislation applies on the basis of what is GAAP at a particular time.