SSAP 21 Accounting for Leases and Hire Purchase contracts
SSAP 21 (August 1984) (PDF)
Leases and hire purchase contracts are means by which companies obtain the right to use or purchase assets. In the UK there is normally no provision in a lease contract for legal title to the leased asset to pass to the lessee.
A hire purchase contract has similar features to a lease except that under a hire purchase contract the hirer may acquire legal title by exercising an option to purchase the asset upon fulfilment of certain conditions (normally the payment of an agreed number of instalments).
SSAP 21 defines two different types of lease: finance leases and operating leases. The distinction between a finance lease and an operating lease will usually be evident from the terms of the contract between the lessor and the lessee. SSAP 21 requires lessees to capitalise material finance leases because the transaction is considered to be the economic equivalent of borrowing to acquire an asset; accordingly, the lessee records the asset and the liability to pay lease rentals in its balance sheet.
An operating lease is more closely akin to the hire of an asset and so the lessee is not required to capitalise the lease.
SSAP 21 also prescribes the accounting treatment in respect of leases to be adopted by lessors.
SSAP 21 is effective for accounting periods starting on or after 1 July 1984 (subject to certain transitional arrangements).
Guidance notes on the application of SSAP 21 were issued in August 1984; they do not form part of the statement of standard accounting practice.
A current project on leasing is developing a standard that will supersede SSAP 21.