Motor Van Lease v. Fixed Assets

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT member discussion
Hi all,

The way I understand this subject is that if it's a long term lease say 3yrs and it has the option of being purchased at the end of the lease then it should be treated as a fixed asset and depreciated etc. along with creating a long term liability account?
The previous accountant did not treat it as an asset in the balance sheet and just put through the leasing costs through the P&L.
Although the option will be available to purchase, my client will probably not do so and hand back the van to the leasing company at the end of the term.
Which way is correct as my balance sheet doesn't balance and I'm having a very blonde day! :lol:

Thanks in advance
Sharon

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    I'm interested in this one too since the previous bloke to me also didn't put two of ours on the balance sheet. Just like yours, he put the monthly outgoing through the P&L, the only difference being that we are very likely to purchase the assets at the end of their life since we'll be getting still fairly expensive Mercedes vans for £1 each!

    I queried this at the time with our accountants - I was then studying DFS and had just covered IAS16/36 (can't remember now, help!) so was probably no more than an annoyance for them and thought I knew too much! - but they said to just leave it as it was.

    Regards,

    Robert
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets


    I was going to capitalise the repayments value once it was finally bought, but didn't. No-one shouted.

    We were responsible for the maintenance but not the RFL - if that matters?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Hummm, I think maintenance etc is an extra expense to the client on top of the lease so I would tend to stick that in motor expenses.
    I would also agree with Sara that it should be capitalised once it's purchased so I wonder if I can just leave it as it is, as an expense on the P&L.
    My balance sheet looks much better if I do that! :lol:
    Interesting that Robert had a similar scenrio :?


    Sharon
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Sorry I can't give my own detailed reply! Exam pressures!!!

    This may help...

    http://www.frc.org.uk/images/uploaded/documents/SSAP 21 Guidance notes.pdf

    Regards

    Dean
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Thanks Dean, that's quite a detailed explanation :D:D:D
    Good luck with your exams, hope their not too taxing!
    Forgive the pun :P

    Sharon
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Usually all hire purchase contracts (especially vans) are finance leases and should be capitalised. Operating leases are rental agreements and all instalments charged to the P&L. If it is a "hire purchase" agreement I would capitalise it as all risks and rewards have been been passed to the lessee.

    SSAP 21 refers to the 90% test where if the present value of the minimum lease payments amounts to either all or 90% or more of the fair value of the leased asset then the transfer or risks and rewards has been passed - though this calculation can sometimes be difficult as net present value tables are required and the interest rate implicit in the lease is often mistaken for the APR figure in the actual lease when it is the discount rate that at the inception of a lease, when applied to the amounts which the lessor expects to receive produces an amount equal to the fair value of the leased asset (SSAP 21 is a very old standard and is usually mis-interpreted in more or less every circumstance I audit).

    Kind regards
    Steve

    EDIT

    A much user friendly interpretation is the FRSSE 2007 - page 50 (hire purchase and leasing) as I suspect this will be more appropriate than the full SSAP 21. Though my final conclusion is that if it says "Hire Purchase Agreement" on the actual agreement then it is always capitalised regardless of what happens at the end of the lease as the risks and rewards have been passed to the lessee.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Thanks Steve, that is very useful.
    Just one other question, as the lease was not capitalised in the previous years accounts, should I reconstruct the balance sheet for that period to show this and put a note to the accounts to that effect?
    In other words, what is the best way to show this in the accounts as there will be a year's depreciation omitted too?

    Sorry if this is an obvious question but not having dealt with this before, I would just like some clarification.
    It's getting to be a long day now and my brain has gone into hibernation!

    Regards
    Sharon
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Yes you will have to do a prior year adjustment.

    In the previous year you will have to bring the asset in as normal, depreciate it as normal, remove the original entries i.e. put the prior year right. This will result in the previous years reserves figure changing and the original opening balances changing.

    Then do the current year once you have the previous year revised.

    If it is a Ltd. Co. a note will have to go in to the accounts under the heading "Prior year adjustment" explaining the reason for the adjustment and the effect it has had on the reserves of the company.

    Unfortunately it will also have taxation implications.

    Sorry it has caused you more work but it is better to get these things right than do what some professional accountants do and cut corners - which is clearly what's happened with your clients previous agents.

    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Motor Van Lease v. Fixed Assets

    Thanks Steve, that's confirmed my fears :cry:
    It's a Partnership as well, just to make things more complicated! :roll:
    Had enough now, must be time to retire with a large glass of red!

    Kind regards

    Sharon

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