SSAP 21, supported by FRS 5, and IAS 17 were brought in to
address the problem of what is commonly referred to as 'off balance
sheet financing'. One of the main aims of such arrangements is to
finance a business’s assets and operations in such a way that
the finance is not shown as a liability in the business's balance
sheet. A further effect is that the assets being financed are
excluded from the accounts, with the result that both the resources
of the entity and its financing are understated.
Therefore, following SSAP 21 and IAS 17, accountants look at
the commercial reality and treat a finance lease much as if it were
a loan by a lessor to a lessee which the lessee uses to buy the
asset. That is, the accounting follows the substance of the
transaction rather than its legal form.
