Leasing - Strict rules for lease deals

Leasing companies face a conservative accounting regime following the publication of a draft SORP that reinforces strict rules set down by the Accounting Standards Board.

The proposals, put forward by the Finance & Leasing Association, are an attempt to clamp down on ‘creative’ practices that led to a series of company collapses, particularly in the IT equipment leasing industry, during the late 1980s.

The most spectacular failure, Atlantic Computers, resulted in the demise of the conglomerate British & Commonwealth after it found the #400m value of its leasing subsidiary was wiped out.

The FLA said that it had concentrated its efforts on the three areas of accounting rules that had been abused by leasing companies in the past – residual value accounting, lease classification and income recognition methods.

Andy Thompson, tax and accounting consultant at the FLA, said: ‘The SORP is a move to a more conservative accounting regime. It adds a bit of flesh to SSAP 21 and FRS5 by sharpening the rules that apply to operating and finance leases and help with lease classification.’

The SORP sets out strict rules that prevent leasing companies from building in unrealistic residual values for equipment into their accounts. It also comes down in favour of income recognition methods that smooth the profits from lease payments after tax has been deducted.

‘Using a post-tax measure takes away the opportunity, exercised by some companies, to accelerate their profits by constructing leases that put all the profit into the early years,’ said Thompson.