Finance Leasing Manual - FLM13.43

Income-into-capital schemes: finance lease or operating lease

In the consolidated accounts of the lessee group these transactions are likely to be governed by FRS5 and treated in accordance with their substance as a finance lease or secured loan. But the treatment in the accounts of the individual companies in the lessee group involved in the transaction will depend on who holds the option to purchase the lessor's economic interest for a capital sum.

• If the lessor granted the option to an associate company of the lessee, we would expect the lessee to report that it has obligations under an operating lease - it is only in the group consolidated accounts that we would expect to see the substance of the transaction reported as a finance lease or a secured loan.

• If the lessor granted the option to the lessee, the lessee should (in accordance with best accounting practice), report the transaction as a finance lease or secured loan and show the leased asset together with associated liabilities in its balance sheet - for accounting periods ending on or after 22nd September 1994 FRS 5 should make mandatory the recognition of the substance of the transaction in this way, and the group consolidated accounts should show the same.