The practice of buying and selling fixed assets under financial leasing conditions is quite widespread today among business entities, and, therefore,the topic of accounting for leasing transactions is also relevant. What accounting officer should know about the reflection of financial leasing transactions in accounting – in the following.
Characteristics of financial lease
Lease transactions, including financial leasing transactions, are reflected in the accounting taking into account the requirements of Accounting Standards 14 “Lease”.
Lease is considered to be financial in the presence of at least one of the following characteristics given in para.4 of Accounting Standards 14:
- the lessee acquires ownership of the leased asset after the expiry of the lease term;
- the lessee has the opportunity and intention to purchase the object of lease at a price lower than its fair value at the date of acquisition;
- the lease term constitutes the major part of the useful life (exploitation) of the leased asset;
- the present value of the minimum lease payments from the beginning of the lease term equals or exceeds the fair value of the leased asset;
- the leased asset has a special character, which allows only the lessee to use it without the cost of its modernization, modification, upgrade;
- the lessee can extend the lease asset for a fee, much lower than the market rent;
- the lease may be terminated by the lessee, which compensates the lessor for his/her loss from the termination of the lease;
- the income or loss from changes in the fair value of the leased asset at the end of the lease term is owned by the lessee.
Accounting by the lessor
The lessor reflects transferred leased asset in the accounting as a receivable of the lessee. In this case, the residual value of the leased asset, which is written off from the balance sheet of the lessor at the time of its transfer to the financial lease, is reflected in other expenses (the cost of realized non-current assets). Income includes proceeds from the sale of non-current assets and financial income, which is subject to receipt by the lessor (paras.10, 11 of Accounting Standards 14).
The distribution of financial income between reporting periods during the lease term is carried out using the rental rate of interest on the balance of the receivable of the lessee (that is, on the balance of the outstanding value of the object of financial leasing) at the beginning of the reporting period.
An object intended for transfer to a financial lease is accounted for under subaccount 286 “Non-current assets and disposal groups held for sale”.
The debt for the property transferred to the financial lease is reflected by the lessor on sub-account 181 “Arrears for the property transferred to the financial lease”.
Accounting by the lessee
The lessee reflects the lease item in accounting as an asset and simultaneously as the liability for the lowest assessment at the beginning of the lease: fair value of the asset or the present value of the minimum lease payments amount (para. 5 of Accounting Standards 14). In other words, the lessee puts the object of financial leasing on balance and depreciates it. This is the main difference between accounting and financial leasing from the operational one.
The depreciation of an item of financial lease is accrued during the period of expected use of the asset (para. 7 of Accounting Standards 14). At the same time, the period of the expected use of the financial lease object is the useful life (if the agreement provides for the transfer of ownership of the asset to the lessee) or the shorter of the two periods - the term of the lease or the useful life of the financial lease item (if it is not provided the transfer of ownership of the property for item of financial lease after the expiry of the lease term).
The difference between the amount of minimum lease payments and the value of the leased asset, which was reflected in the lessee’s accounts at the beginning of the lease, is its financial expenses.
The expenses incurred by him/her in improving the financial lease item are reflected as capital investments.
The lessee should reflect lease payments on sub-account 531 “Financial Lease Liabilities”.
