FRS 5 Reporting the Substance of Transactions

 FRS 5 (April 1994) (PDF)

 Amendment to FRS 5 (September 1998) (PDF) 

 Amendment to FRS 5 (November 2003) (PDF)

FRS 5 was effective for accounting periods ending on or after 22 September 1994. (Application Note F was effective from 10 September 1998. Application Note G was effective from 23 December 2003.)

From 1 January 2007 amendments to FRS 26 'Financial Instruments: Recognition and Measurement' amended FRS 5 to exclude from its scope transactions in financial assets that would then fall within the scope of FRS 26.

It was withdrawn for accounting periods beginning on or after 1 January 2015, when FRS 102 became effective. ​


FRS 5 addresses the problem of what is commonly referred to as 'off balance sheet financing'. One of the main aims of such arrangements is to finance a company's assets and operations in such a way that the finance is not shown as a liability in the company's balance sheet. A further effect is that the assets being financed are excluded from the accounts, with the result that both the resources of the entity and its financing are understated.

FRS 5 requires that the substance of an entity's transactions is reported in its financial statements. This requires that the commercial effect of a transaction and any resulting assets, liabilities, gains and losses are shown and that the accounts do not merely report the legal form of a transaction.

For example, a company may sell (ie transfer legal title to) an asset and enter into a concurrent agreement to repurchase the asset at the sales price plus interest. The asset may remain on the premises of the 'seller' and continue to be used in its business. In such a case, the company continues to enjoy the economic benefit of the asset and to be exposed to the principal risks inherent in those benefits. FRS 5 requires that the asset continues to be reported as an asset of the seller, notwithstanding the transfer of legal title, and that a liability is recognised for the 'seller's' obligation to repay the sales price plus interest.

To aid its application, FRS 5 contains seven application notes that show how its requirements apply to transactions with certain features. These are:

  1. Consignment stock
  2. Sale and repurchase agreements
  3. Factoring of debts
  4. Securitised assets
  5. Loan transfers
  6. Private Finance Initiative and similar contracts (September 1998)
  7. Revenue recognition (November 2003)
  8. However, FRS 5 has general application and is not limited to the transactions covered in the application notes.