Treatment of leases


B

Barry

Can someone point me in the right direction?

I am trying to finalise the company accounts and am having difficulty with
the treatment of vaious leases the company has for plant and vehicles.

I would normally assume that the monthly lease payments (net of Vat) are a
hire charge and would charge this to the P&L. I have now been told that
this is not correct and that the asset should be included on the Balance
Sheet and only the finance charge plus depreciation should be posted to the
P&L.

I am confused. Is there a good reference book on the subject or can anyone
confirm or offer any guidance.

Thank you.
 
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M

Martin

Barry said:
Can someone point me in the right direction?

I am trying to finalise the company accounts and am having difficulty with
the treatment of vaious leases the company has for plant and vehicles.

I would normally assume that the monthly lease payments (net of Vat) are a
hire charge and would charge this to the P&L. I have now been told that
this is not correct and that the asset should be included on the Balance
Sheet and only the finance charge plus depreciation should be posted to the
P&L.

I am confused. Is there a good reference book on the subject or can anyone
confirm or offer any guidance.

Thank you.
What precisely are the terms of the lease(s)? Eg who owns the asset(s) at
the end of the term? Is it a finance lease?

Also, the accounting treatment may be different from the tax treatment.

I think SSAP21 covers this, but others here may have more up to date info.
 
J

Jonathan Bryce

Barry said:
Can someone point me in the right direction?

I am trying to finalise the company accounts and am having difficulty with
the treatment of vaious leases the company has for plant and vehicles.

I would normally assume that the monthly lease payments (net of Vat) are a
hire charge and would charge this to the P&L. I have now been told that
this is not correct and that the asset should be included on the Balance
Sheet and only the finance charge plus depreciation should be posted to
the P&L.

I am confused. Is there a good reference book on the subject or can
anyone confirm or offer any guidance.
If it is a finance lease:

You find out what it would cost you if you had paid cash for it, and put
this amount in the balance sheet as a fixed asset. You depreciate this in
the same way as other similar assets.

You also put a loan in the balance sheet for the cash price, and treat the
monthly payments as repayments towards this loan. The amount by which the
total monthly payments exceed the cash price is treated as interest/finance
cost, and charged to the P&L.
 
J

John Pointon

Barry said:
Can someone point me in the right direction?

I am trying to finalise the company accounts and am having difficulty with
the treatment of vaious leases the company has for plant and vehicles.

I would normally assume that the monthly lease payments (net of Vat) are a
hire charge and would charge this to the P&L. I have now been told that
this is not correct and that the asset should be included on the Balance
Sheet and only the finance charge plus depreciation should be posted to the
P&L.

I am confused. Is there a good reference book on the subject or can anyone
confirm or offer any guidance.

Thank you.
Have a look at SSAP 21 "Accounting for leases and hire purchase" a
discussion of which can be seen at
http://executivecaliber.ws/sys-tmpl/ssap21/.

If you want a copy of SSAP 21 email privately and I will send you one
in PDF format.

John Pointon
Accountant, Tax Consultant
"in business to grow your business"
 
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B

Barry

thank you for your help - it has assisted me very much. What a complicated
subject!
 

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