Treatment of Leases

Beccy128

Hi All,

I know this has been done before but I need to clarify things for my own sanity.

Client has taken out a Lease Agreement for a piece of equipment.

£20k + VAT 'Advance Rental' Paid followed by 36 monthly payments of £1042.42 + VAT

The Lease Agreement specifically says that the Hirer cannot claim Capital Allowances on the asset as the 'owner' is the leasing company. However - our client is responsible for insuring the asset etc and can buy it for a nominal fee at the end of the leasing term.

The leasing company have advised that we put ALL payments though the P&L and only capitalise the asset at the end of the lease term for the value of the 'nominal' payment. Won't this then look odd because we will have an asset on the BS that is actually worth approx £50k showing for a few hundred...:huh:

I would really welcome any advice on this matter. The more I look into it the more confused I get.

Does anyone have the definitive answer?!

Merry Christmas All! :001_smile:

NeilH

Hi

This all comes down to the classification of the lease, is it an operating lease or finance lease?

If it's an operating lease, put everything through the P&L, if it's a finance lease then there will be balance sheet aspects (asset value, depreciation and a corresponding lease liability).

When I first read your post I thought finance lease, but now not so sure - more information would be needed.

A few useful articles here: http://www.leasingworld.co.uk/subpages/current_uk_system.php http://www2.accaglobal.com/archive/2888864/30941

The above are a little out of date, but give the general technicalities.

Neil

reader

Beccy128 wrote: »

our client is responsible for insuring the asset etc and can buy it for a nominal fee at the end of the leasing term.

The leasing company have advised that we put ALL payments though the P&L and only capitalise the asset at the end of the lease term for the value of the 'nominal' payment. Won't this then look odd because we will have an asset on the BS that is actually worth approx £50k showing for a few hundred...:huh:

As far as I'm aware, under historical cost convention, the value of fixed assets should be recorded in the accounts at their cost price. If it costs the business £100 (to buy a £50,000 piece of equipment) then the asset should be recorded at £100. So, in answer to your question, no it won't make the balance sheet look odd as the asset cost the business £100. (What would make the balance sheet look odd is capitalising a piece of kit at a historical cost of £50,000 when it only cost £100).