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In your lecture you mention an example that if Irina owns a machine that cost £100,000 the she would show a net current asset of £100,000, however if you are leasing the same machine/renting it, then Substance over form would require you to show the true effect not the legal substance.
Does this mean that you would also show a net asset of £100,000 in your balance sheet or does this mean that machinery leasing costs would be equal to that of Irina’s net asset over the period? As I cannot see how leasing costs which are an expense, would be able to be shown as a Non Current Asset in this particular example.
Not a huge issue as I know there are other topics on the exam more important, but I just wanted to clarify this as you did not specify how your accounts would show the leased/rented machinery in your accounts.
Thanks
James
Hi
According to Leases IAS and the concept of substance over form, Irina would capitalise the fair value of the finance leased asset – the double entry would be :-
Dr TNCA
Cr Obligations under Finance Lease AccountThe value to be capitalised is the lower of the fair value of the asset and the present value of the minimum lease payments. And, of course, Irina would then depreciate the asset over the shorter of the lease term and the estimated useful life of the asset and the depreciation is obviously shown as an expense
The lessor will want “compensation” for allowing Irina the use of the machine over the lease term. That compensation is effected by way of finance lease interest. It’s that interest which is the expense additional to the depreciation. The interest is included within the installments which Irina will pay over the life of the lease and, in practice, will be identified within the lease contract signed by both the lessor and the lessee. However, in an exam situation, you may very well be asked to compute the amount of the lease interest.
Is that clear or do you have any further questions? However ……..!!!!!!!!
Three weeks ago, towards the end of May 2013, a new Standard has been approved whereby lessees must now also account for assets held on operating leases – the value to be capitalised is the present value of the minimum lease payments (the same as already applies to finance leases) It’s a hotly disputed Standard and has not met with widespread approval so “Watch this space”!
Could you clarify the position for both the company that owned the asset vs the company that leases it with an example please…I know it is unlikely that it will be asked in the exam but just for my own understanding it would be helpful to see an extract from the balance sheet showing the asset value, expense etc
Thank you.
James
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