Anonymous
Share this content
0
856

Finance lease and Accounting Journals -UPDATED

Please confirm entries

Hi I am just having some trouble determining the finance lease postings. (UPDATED)

E.g. Asset PV £62,500 +VAT. The lease is from an asset finance company -the schedule shows fixed term rental agreement to my client. Value of payments is £70,847+VAT. At the end of the agreement the client can purchase it for a nominal value i.e £50.

So in the accounts, the asset is recognised as £62,500 and the associated liability of £62,500 (being the lower of the value and the payments due). Under FRS102, substantially all risks and rewards have transferred (even though ownership has not), the client is responsible for insuring the asset, it has the option to purchase at the end of the term for a nominal value and the pv of the "rental payments" are more than the fair value of the asset - would it not be then correct to capitalise the asset and associated liability?

My issue is with the "rent payments each month" so if say they are paying back £582.50+VAT in a month. How would we reduce down the liabilty and claim back the VAT. Would we calculate the effective rate of interest and include that as an interest charge for the period? If so how does the client then claim back the VAT on the monthly payments is it a claim on interest on repaying the liability? 

Sorry - I am getting a little confused with this one. Can anyone be so kind as to assist - many thanks

Would it be as follows: 

DR ASSET VALUE £  62,500.00(NET) CR LIABILITY £  62,500.00 / DR LIABILITY £582.50 DR VAT £116.50 CR BANK £ 699.00 / DR INTEREST £ 2,330.31    CR LIABILITY £    2,330.31 (BEING EFFECITVE RATE OF INTEREST METHOD) = CLOSING LIABILITY £  64,247.81

Replies

Please login or register to join the discussion.

By Ruddles
16th Nov 2018 20:52

For starters, you need to establish the true nature of the agreement - it doesn’t sound like a finance lease to me.

Thanks (0)
avatar
17th Nov 2018 10:03

You need to find out if it is lease purchase or lease rental. It sounds like the latter in which case you will not show the asset in your books until you acquire it for the nominal amount at the end of the lease.

Thanks (0)
avatar
By PALacc
17th Nov 2018 14:30

You will need to get full documentation to see the true nature of the transaction

Thanks (0)
avatar
By PALacc
to PALacc
17th Nov 2018 14:31

Y

Thanks (0)
avatar
17th Nov 2018 14:52

My company took out a similar lease a few weeks ago. We were told that there are 2 types of finace leases: lease purchase and lease rental.

It sounds like you have taken out a lease rental like we have so you should not be putting the asset on your BS until you acquire it.

Thanks (0)
avatar
By PALacc
to Samantha20
17th Nov 2018 15:10

Do you have a link to the differences on this? The OP has stated that there is the option to purchase for £50 at the end so would that not fall under a finance lease which is capitalised?

Thanks (0)
avatar
17th Nov 2018 16:51

I don't have a link, but the finance company said that both were finance leases. They said that it main difference was the way that VAT was treated. With the lease purchase we would capitalise the asset and pay over the full VAT to them and then reclaim the VAT in our VAT return. They said that the way that we were doing it (lease rental), we would just be treating the payments we made as a P&L charge and only reclaiming the VAT on the rental payment. They said that once we paid the nominal amount at the end of the lease the assets would be ours and it was then that we would put it on our balance sheet.

Thanks (0)
By Ruddles
17th Nov 2018 17:14

Here we go again.

A lease is a lease is a lease. Whether it should be treated as a finance lease or an operating lease will depend on the facts.

But one thing is almost certain - an agreement with an option to purchase is not a finance lease.

Thanks (0)
avatar
By PALacc
17th Nov 2018 18:11

If it satisfies being a finance lease Re payments being in excess of the fair value etc as you have identified in line with FRS102 then I would capitalise it at FV and the associated liability.

Payments for “rent” and vat - claim vat at time of payment. “Rent element debit to rent account - credit to bank. then work out the interest and - Credit “rent” & debit prepayments for the “rent” amount being allowed as the interest calculated.

As a finance lease depreciation is not added back so that tax relief is given that way , as it does not qualify for capital allowances. Tax relief is then given on the interest element for the year.

In summary you have recognised the asset in respect to frs102 finance lease. Tax relief on capital element given over the life of lease due to capital allowances not being available. Tax relief is given interest element in each period under effective rate of interest method.

That’s how I’d do it anyway

Thanks (0)
By Ruddles
17th Nov 2018 19:14

Why is everyone missing the obvious? An agreement with an option to purchase is a lease purchase or a hire purchase agreement. It is NOT a finance lease.

Thanks (0)
avatar
By PALacc
to Ruddles
17th Nov 2018 22:44

What would your accounting entries be ruddles?

Thanks (0)
By Ruddles
to PALacc
17th Nov 2018 23:55

My accounting entries would depend on the nature of the agreement. So far, we can only guess at what that might be - although it points towards HP or lease purchase

Thanks (1)
Share this content