I've tried to refresh my memory by reading IAS 17 but could someone please confirm if the below initial recognition is correct for a Finance Lease / Hire Purchase Agreement being paid over 60 months?
There are 4 cost elements to the agreement: Equipment, VAT, Interest and a small admin charge.
The admin charge and VAT are paid upfront with the equipment and interest being paid over the course of the 60 months.
Capitalise the equipment now and depreciate over its useful life (happens to be same as agreement period)
Claim the Input VAT now
Put the total Interest payable to prepayments and release to P&L monthly over term of the agreement
Charge the admin fee to the P&L
Create a Hire Purchase Liability which will be the total of all 4 costs elements.
Many thanks.
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Yes you can do it that way. I'd keep the HP account "net" and charge the interest as it arose, but it has the same effect.
Agree except that the HP interest should not be in prepayments but deducted from the gross HP creditor. In classic book-keeping it's called an HP interest suspense account.