There is a client who has a history of purchasing all its vehicles in the name of his company.
In one particular year the company was unable to meet the "vehicle trade-in" deadline, and upon this the member undertook to purchase the new vehicle in his name. (The vehicle had a limited time in which it could be sold)
The vehicle was financed through an installment sale agreement with the financier, in the name of the member.
However, the company undertook to pay for the monthly installments as well as the operational and maintenance costs of the vehicle (petrol, fines, maintenance etc).
Theoretically (and legally) the vehicle was not recognized in the AFS as the ownership and rights to the vehicle was not in the name of the company, but in the member's name.
Because of this, all installments paid and expenses paid by the company for this vehicle, was debited to the member's loan account. (An asset)
After a year, the member decided to trade in this vehicle for a newer one, but this time in the name of the company (like it should have been).
At the present reporting date, the member now owes the company all installments paid + expenses paid for the old vehicle (that was in the member's name).
The member argues that this loan will not be repaid by him as he did not enjoy the use of the vehicle but it was merely enjoyed, used by and benefited the company.
Because of this, the loan owing to the company (asset) is not recoverable and thus will not be repaid.
For fair presentation, this loan should be written off / impaired as it is irrecoverable.
However, because of the large amount (entire cost of the vehicle + running costs), the write off is not accurate and fairly justified. Also for tax, this will be a red flag.
My question and argument is:
Option one
Can I apply the IAS 17, "Substance over Legal Form Finance Lease" principle to this instance in the year when the vehicle was used and traded in?
My argument is that the company did enjoy the benefits of the vehicle, and economic benefits did flow to the entity.
The business used this vehicle, and incurred all expenditure to run and maintain it.
The substance is that the company has control over this vehicle as it pays and maintains this vehicle.
Could I recognize this vehicle, according to the IAS 17 Finance lease recognition criteria, as the company's vehicle?
(Dr. Asset ; Cr. ISA Debt)
In turn, this will derecognize the member's loan and fairly present the information in the AFS.
Meaning there will be no member's loan in the first place.
Also, when the vehicle was traded in (disposed of), could I derecognize it, and raise the complimentary profit etc?
If this option can be applied, would it be correct to state that the lessee would be the company and the lessor would be the vehicle financier?
In terms of tax, I know that the installments paid will not be deductible along with its wear and tear as this is merely an accounting principle and not a tax transaction.
Option two: Another option I thought of was that that the member could prepare an agreement in which he could rent out the vehicle to the company for its term, at a cost equal to the monthly installments and expenses.
In turn this will raise a rental expense, and derecognize the loan?
I know that in turn the member will have to recognize the income in his personal tax.
However with this option it does not seem correct, as the member does not incur any cost in financing the vehicle.
The company finances the vehicle and it would be incorrect for the company to charge itself for the financing of the vehicle.
Hence my approach of the IAS 17 principle.
Is there perhaps another way I can derecognize this member's loan relating to the actual acquisition of this vehicle?
Or is this purely just a member's loan that the member has to repay?
Please note, the member made it quite clear that he will not pay it back because it is not his vehicle, and that he just placed it on his name for the sake of obtaining it in time.
Also, during the year the vehicle was in use the registration name never got changed either.
I'd appreciate some advise on what to do as this member's loan is quite straightforward and is purely due to the vehicle.
Also, it would be the first time I apply this IAS 17 principle and need to know if its applicable in this instance.
Thank you.
In one particular year the company was unable to meet the "vehicle trade-in" deadline, and upon this the member undertook to purchase the new vehicle in his name. (The vehicle had a limited time in which it could be sold)
The vehicle was financed through an installment sale agreement with the financier, in the name of the member.
However, the company undertook to pay for the monthly installments as well as the operational and maintenance costs of the vehicle (petrol, fines, maintenance etc).
Theoretically (and legally) the vehicle was not recognized in the AFS as the ownership and rights to the vehicle was not in the name of the company, but in the member's name.
Because of this, all installments paid and expenses paid by the company for this vehicle, was debited to the member's loan account. (An asset)
After a year, the member decided to trade in this vehicle for a newer one, but this time in the name of the company (like it should have been).
At the present reporting date, the member now owes the company all installments paid + expenses paid for the old vehicle (that was in the member's name).
The member argues that this loan will not be repaid by him as he did not enjoy the use of the vehicle but it was merely enjoyed, used by and benefited the company.
Because of this, the loan owing to the company (asset) is not recoverable and thus will not be repaid.
For fair presentation, this loan should be written off / impaired as it is irrecoverable.
However, because of the large amount (entire cost of the vehicle + running costs), the write off is not accurate and fairly justified. Also for tax, this will be a red flag.
My question and argument is:
Option one
Can I apply the IAS 17, "Substance over Legal Form Finance Lease" principle to this instance in the year when the vehicle was used and traded in?
My argument is that the company did enjoy the benefits of the vehicle, and economic benefits did flow to the entity.
The business used this vehicle, and incurred all expenditure to run and maintain it.
The substance is that the company has control over this vehicle as it pays and maintains this vehicle.
Could I recognize this vehicle, according to the IAS 17 Finance lease recognition criteria, as the company's vehicle?
(Dr. Asset ; Cr. ISA Debt)
In turn, this will derecognize the member's loan and fairly present the information in the AFS.
Meaning there will be no member's loan in the first place.
Also, when the vehicle was traded in (disposed of), could I derecognize it, and raise the complimentary profit etc?
If this option can be applied, would it be correct to state that the lessee would be the company and the lessor would be the vehicle financier?
In terms of tax, I know that the installments paid will not be deductible along with its wear and tear as this is merely an accounting principle and not a tax transaction.
Option two: Another option I thought of was that that the member could prepare an agreement in which he could rent out the vehicle to the company for its term, at a cost equal to the monthly installments and expenses.
In turn this will raise a rental expense, and derecognize the loan?
I know that in turn the member will have to recognize the income in his personal tax.
However with this option it does not seem correct, as the member does not incur any cost in financing the vehicle.
The company finances the vehicle and it would be incorrect for the company to charge itself for the financing of the vehicle.
Hence my approach of the IAS 17 principle.
Is there perhaps another way I can derecognize this member's loan relating to the actual acquisition of this vehicle?
Or is this purely just a member's loan that the member has to repay?
Please note, the member made it quite clear that he will not pay it back because it is not his vehicle, and that he just placed it on his name for the sake of obtaining it in time.
Also, during the year the vehicle was in use the registration name never got changed either.
I'd appreciate some advise on what to do as this member's loan is quite straightforward and is purely due to the vehicle.
Also, it would be the first time I apply this IAS 17 principle and need to know if its applicable in this instance.
Thank you.