Finance Leasing Manual - FLM4.07

Accountancy treatment of finance leases 1984 to 1994

The abuses (and dramatic collapses of unsound lessees) led to new accountancy rules in 1984. These were published as SSAP 21 (Statement of Standard Accounting Practice 21). This tried to make lessors and lessees reflect the loan characteristics of a finance lease in both their accounts. In essence for accounting purposes:

• the finance lessor had to report the deal as if it were a loan and not the purchase and subsequent hire of an asset to a lessee; and

• the finance lessee had to report the deal as if it were the purchase of an asset with a loan.

The SSAP 21 accounts presentation method continues to apply after 1994 but it is now buttressed by Financial Reporting Standard (FRS) 5 which aims to stop artificial avoidance of the earlier rules. See FLM4.28 onwards for more about FRS5.