BLM16030 - Lease accounting: leasebacks and sub-leases: lease and leaseback

A lease and leaseback is almost certainly part of a scheme to avoid tax, whether the leaseback is an operating lease or a finance lease.

FRS 102 20.3A(b) confirms that determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether the arrangement contains a right to use the asset. This will be the case where the arrangement conveys to the purchaser the right to control the use of the underlying asset.

The accounting for a lease and leaseback will therefore follow the substance of the transaction. Where there is a sequence of transactions that do not convey the right to use an asset they should not be accounted for as a lease. Therefore, if a party’s right to use an asset is the same after a series of transactions as before them, the arrangements will fall out of being recognised as a lease. Accordingly, the accounting treatment should follow the substance of the arrangements taken as a whole.

You should seek advice from your Advisory Accountant if the accounting treatment of a lease and leaseback arrangement is material.