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Hi Steve. Is it right that no interest is charged in year 5 in your finance lease example?
Thanks Tom. The original workings were based on payments in advance, which was not the case in the example above as the client is paying monthly. The wrong spreadsheet was embedded into the article!
Well spotted, though ;-)
I had a lengthy discussion about this with the institute's helpline who also advised using exactly this approach for our clients that have HP and finance leases. The problem is for me that you end up in exactly the same place you would have ended up if you used the straight line method of interest allocation. I can see the logic but I don't agree that we should have to go to these extremes for our clients who are only small at the end of the day. Hopefully they'll bring back FRSSE once we are out of the EU!
Under FRS 102, can the level spread method of allocating the interest be adopted for small value finance leases based on materiality?
Is the author prepared to comment on the accounting treatment required under FRS 102 for the transitional accounting adjustments where the level spread method of allocating interest has previously been adopted.
I have always used Rule of 78, which is as good an approximation as any tapered cash flow of such a lease. From the perspective of small and micro clients any difference can only be immaterial.
OTT, as are the continual changes in these rules.
Other than the more substantial businesses, (and I am not sure many of those are bothered either), no one cares!
Agree, I will continue with SODS method, any differences for my clients will be so immaterial that the cost/benefit of the b*llocks, with no offence to Steve intended, described above is none - one wonders if these people can't find a useful job instead of changing the goalposts every few years - If one didn't know better one would think they did it just to keep themselves in a job!
Thanks for a very helpful article.
It would be useful to see the changes for FRS102 in respect of Lessors (if there are any)
Thanks for this Steve.
To clarify a couple of points:
1. The straight-line basis is presumably now verboten?
2. The operating lease disclosure example - why £20k for the "later than one year and not later than five years"? Rather than £40k i.e. 4 years @ £10k pa (in addition to the < one year disclosure)?
Thanks in advance
I think the disclosure should be £10k within one year, leaving £30k in later than one year and not later than five years. The loan starts 1 Jan 2014, remember, so one year's liability has been satisfied in the current financial year, leaving 4 yrs outstanding at the year end, not 5 as you surmised.
Cheers Wolfie.
On reflection, years 1 & 2 have already been paid (2014 & 2015), leaving £30k left as payable overall - 10K within 12 months & £20k between 2 & 5 years. i.e. As Steve has in the original article!
Note to self: must read question fully before answering...
Ha! I stand corrected. As my old FT lecturer used to say before exam time - "RTFQ"!!
Hmmm. I have tried to replicate your EIR example but I think you are missing formulas in your Interest column which link these cells to your C1 EIR target cell. Can you advise?
Hmmm. I have tried to replicate your EIR example but I think you are missing formulas in your Interest column which link these cells to your C1 EIR target cell. Can you advise?
I think it's c1 x B4 then c1 x b5 etc. I redid it and it comes back to the example. I'm using these spreadsheets for our clients and they seem to be a lot easier than discounting these bloo@y things.
Yes for the goal seek to work the interest calculation formulas will need to rely on cell C1
I printed the original article and it had the formulas in that's how I got it To work - the updated article doesn't though.
All of this is absurd for "small time" accountants and their clients.
We adopt the "KISS" method
This is the first time I have read an FRS102 article and smiled at the end - this is the way we have always worked out interest on loans, and always described it as Effective Interest Rate to clients who used to quote APR at me, but I never knew about the Goal Seek function and I used to work it out on trial and error to get the same result!
The justification in the extra work was always to allow clients to make sure they were claiming the lions share of interest in the early years which, of course, reflects the reality of the position. After all our job is to help them save tax!
Thanks Steve!
Dear Steve, thank you so much for this as we've been struggling to understand what the effective rate actually means!
I have a question over the initial values in the Balance Sheet. In your example you say that the present value of the minimum lease payments is equal to the fair value of the asset but in the calculation the lease payments are greater than the Finance Liability. Am I missing something on those initial entries?
Hi Steve
Ignore my question, I think I've got majorly confused.
Thanks
Carole
Steve - slightly off topic on the lease example as such. Wondering if there is provision in FRS 102 to ever treat the finance charges in a lease as borrowing costs under Section 25 which appears to accommodate leases ( 25.1(b)) - would this then permit a firm to capitalise the charges on a lease as borrowing costs as part of the qualifying asset when brought into use ? Ed
and FRS 16 for property leases with up front rent frees ... anyone looked at this yet [ Steve ?] and how balance sheets will look at commencement [ especially multi site retailers] ?
Guess the examples above for Motors would be adjusted by an approximate residual/trade in at the end of lease