Finance Leasing Manual - FLM49.02

Relevance of FRS2 to Schedule 12 FA 1997

It may be possible to take a different view of a deal at the group level because, for example, a leasing deal is fragmented between two or more companies. One company is the lessor but the terms are such that there is no finance lease. This may be because, say, viewed on its own the minimum lease rental payments only repay 80% of the fair value of the leased asset. But the lessor may also be a subsidiary of a fellow group member; the lessor exists just for one large leasing deal. Under separate but associated arrangements the fellow group member of the lessor may be entitled to receive a capital sum from the lessee group for the shares in the lessor.

The object of the deal may be that the capital sum will be enough to guarantee the lessor group full repayment of the 'loan' made by the lessor plus a commercial rate of interest. In other words, viewing the two companies together, there is a finance lease but neither on its own has a finance lease. The lessor returns a low profit from the actual rentals it receives while the intermediate parent shows a capital gain on the shares.

At the consolidated group level, however, the economic reality for the group as a whole has to be shown. So here should emerge the fact that the group has a finance lease and, similarly, the true earnings on that lease should be shown. Schedule 12 FA 1997 therefore takes account of the group position.