Funny lease term

cornflower

If you have an asset on lease where the risks and rewards go to the lesser then it's a finance lease which I understand. But what if the terms state that the residual value is 45% of cost and anything below 20% of cost means risks and rewards pass to the lessor. Would this mean the lease is then not a finance lease?
Thanks in advance.

Steve Collings

Hi,

The clause would not affect the classification of the lease because it is not taken into account when determining whether it is a finance or an operating lease. The lessee will take the residual risk and the lease should still be treated as a finance lease.

Hope that helps.

Kind regards
Steve

cornflower

Thanks Steve. My boss is adamant that it is not a finance lease and has told me to put it against the profit and loss as motor expenses. I contacted our auditor before i saw your reply and she said it was a finance lease but my boss is adamant that it is not.
This is worrying me now because I am preparing the first draft accounts and I know they will be wrong. What should I do?

Steve Collings

In your situation I would discuss the issue with your boss and explain why it is not an operating lease and the implications this could have on the auditor's report. If your boss is still adamant then there's not really anything else you can do other than keep a record of your discussion. The auditors will then take the issue up with your boss and if there is still refusal to put through the correct accounting treatment then they will qualify their audit opinion.

Kind regards
Steve