a The Off Balance Sheet Finance Debate

For over twenty years, off balance sheet finance has been a significant financial reporting issue.

The publication in 1984 of SSAP 21, Leases and hire purchase transactions, marked an important step forward. Prior to SSAP 21 companies were not obliged to bring finance leased assets and related obligations into their balance sheets (see Chapter 14).

However, following the issue of SSAP 21, a number of loopholes still remained. Some companies succeeded in reporting transactions in accordance with their strict legal form in situations when this conflicted with commercial substance.

b Accounting Standards Board

The Accounting Standards Board put this subject high up its agenda and issued a Standard FRS 5, Reporting the substance of transactions.

The Statement of Principles referred to in Chapter 4, underlines the principles of FRS 5.

c FRS 5 A Standard Based on General Principles

FRS 5 sets out general principles which are capable of being applied to a variety of transactions. In this respect, FRS 5 is different from other Standards. At the time of issue, most FRS 5 applications could be identified fairly readily. However, more less obvious applications of FRS 5 began to emerge as FRS 5 continued to play an increasingly central-stage role.

a Reporting Substance

The basic message of FRS 5 is clear paragraph 14 of the Standard requires that "A reporting entity's financial statement should report the substance of the transactions into which it has entered".

b Commercial Effect...