Finance Leasing Manual - FLM31.16

First condition: leasing arrangements

In considering whether this first condition is satisfied the terms of the lease are not to be viewed in isolation. Instead regard must be had to the 'leasing arrangements'. These are defined in Paragraph 30(1) as including not only the lease itself but also:

• 'any arrangements relating to or connected with the lease of the asset'; and

• 'any other arrangements of which the lease of the asset forms part.'

For example, a lease viewed in isolation may be reasonably regarded as an operating lease under SSAP 21. But if options, held by an associated company of the lessee, to buy out the lessor are taken into account it becomes clear that in practice it is highly unlikely that any substantial risks or rewards of ownership lie with the lessor - with the result that the lease should be regarded as a finance lease. The requirement that the 'leasing arrangements' are to be considered, rather than the lease in isolation, ensures that the lease counts as a finance lease.