Finance Leasing Manual - FLM13.05

Sale and leasebacks: accounting treatment

A sale followed by a leaseback in the form of a finance lease can result in a profit or a loss if the capital value attributed to the asset for the purposes of the lease is not the same as the carrying value of the asset in the books of the vendor/lessee up to the time of sale. The example at FLM13.14 shows that where an asset is sold and leased-back for more than its book value there will be a profit on the disposal of an asset. Similarly, if an asset is sold and leased-back for less than its book value, there will be a loss on disposal.

Capital / revenue issues are primarily questions of law, not of accounting treatment (see IM602). Because of the bookkeeping the whereabouts of the profit may not be particularly obvious, but there is nonetheless a (capital) profit which, if it is recognised in measuring the amount of lease rentals written off in the profit and loss account, should be excluded in the tax computation. Similarly, the whereabouts in the accounts of any loss on disposal may not be obvious, but if there is a loss it will be a capital loss which should not be deducted for tax purposes.