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Help with accounting for for operating leases

Help with accounting for for operating leases

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Hi, 

I hope someone can help me - I'm sure the answer is obvious but I'm beginning to tie myself up in knots! 

We have recently entered a lease agreement to lease a coffee machine over 39 months.

I am stuggling with the accounting entries.

I believe that the machine itself needs to be classed as an asset, and a liability should be entered for the value of the lease.  These amounts should be equal.   I also believe that the payments themselves should be reflected in the P&L. 

We have received an invoice for the first year of lease payments which is direct debited over the course of the year 

  • Entry 1
    • Debit Asset account for 1st year value of the machine 
    • Credit Liability (A/P account) for 1st year value of machine
  • Entry 2
    • Debit Asset account for long term liability account for remaining value of machine 
    • Credit Long term liability account for remaining value of machine as yet uninvoiced

This creates the value of the asset and the short term and long term liability representing the lease.  

The lease payments should be recognised in the P&L.   This is the bit I am struggling with.

Recording the DD payments against the invoice in the A/P account will obviously reduce the value of the short term A/P liability to £0 over the course of the first year. 

It will also create a credit entry in the bank account. 

How then do I get these payments to show up in the P&L...?

Thanks for your help! 

 

 

 

Replies (5)

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By paul.benny
02nd Jul 2019 13:57

You’re definitely overthinking this one. Unfortunately, so too have the International Accounting Standards Board.

Simple answer
Operating leases are just a P&L expense. Your monthly charge for the coffee machine is an expense like the coffee.

Complicated answer
IFRS16 says that you haven’t really leased your coffee machine. You’ve actually bought it and borrowed the money. The monthly payments are loan repayments. So you have to calculate the implied interest in the monthly repayments and split them between the balance sheet (repayment) and P&L (interest).

The bit you missed out in your description is to depreciate the asset. Which you also have to do under IFRS16.

What to do
The coffee machine rental is probably not material, so you could follow the simple answer.

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Replying to paul.benny:
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By katieq
02nd Jul 2019 14:42

Thanks. We use FRS102 - would the accounting treatment be the same under those rules? We also have a new lease for an office building. I was assuming that the treatment would be the same for that but this will definitely be a material amount so I guess I need to do the complicated thing with the office building?

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Replying to katieq:
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By paul.benny
02nd Jul 2019 15:55

The good news is that under FRS 102, you don't need to follow IFRS 16 for leases.

But I'd have a word with your accountants/auditors to be sure as they will have a fuller picture of your situation. Just ask them whether you have to account for your office under IFRS16.

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By Duggimon
02nd Jul 2019 15:52

You have the asset, the liability, the payments and the expense. The asset and the liability decrease together, and the payments go to the P&L as expenses.

Or ignore the asset and liability and just disclose as an operating lease commitment without putting it on the balance sheet, which I'm fairly sure is all you need to do under FRS 102.

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RLI
By lionofludesch
03rd Jul 2019 09:28

The tricky bit is usually establishing the cost price of the asset.

But - yes - if you're going through the rigmarole, you need to regard it as hire purchase.

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