HP agreements again

catja

Hi could someone explain the correct treatment of HP agreements just so I know I've got it straight.

The net cost of the item is capitalised onthe balance sheet and depreciation is charged.

The interest on the HP for the year is put to the P&L and then?

I know the amount owed is put as a liability in the balance sheet but I am getting various answers from people as to how it is shown.

Do you work out what the next years repayment will be (does this include the next years interest) and put that in short term creditors and then put the balance to long term creditors?

This was something we were just never taught in class.

Poodle

Hi Catja

If you are refering to the disclosure requirements under SSAP 21 then the amounts of obligations relating to finance leases (including HP) (net of finance charges allocated to future periods) should be disclosed separately from other obligations and liabilities on the balance sheet and should be analysied between amounts payable in the next year, amounts payable in the second and fifth years inclusive from the balance sheet date and the aggregate amounts payable thereafter.

Only the outstanding capital element is disclosed under creditors. That is what is meant by 'net of finance charges allocated to future periods'

So your balance sheet will look like this:

Tangible assets held under hire purchase agreements
Plant and machinery at cost £XX
Less accumulated depreciation (£XX)

Creditors: amounts falling due within one year
Obligations under hire purchase agreements £XX

Creditors: amounts falling due after more than one year
Obligations undr HP agreements, falling due within 2 - 5 years £XX

and in the P & L

Interest payable and similar charges
Hire purchase finance charges £XX

There are several of ways to calculate the amount of interest charged in the P & L for the year including, the level spread method and the actural method.

Most commonly for small businesses and allowable for companies unders FRSSE the level spread method or straight line basis is used. It is unsientific and assumes that finance charges accrue evenly over the term of the finance lease.

Poodle

catja

Thats brilliant, thanks Poodle