Financial leasing is widespread phenomenon in business activity. It is clear, because when there is lack of necessary current assets, it is possible to get the right to the usage and possession of the necessary equipment or other property with its help. Let’s consider the procedure for accounting of leasing transactions of lessor and lessee.
Financial leasing transactions should be reflected in accordance with the requirements of Accounting Regulations 14 “Lease” in accounting of both parties of a contract. At the same time lease is considered to be financial if there is at least one of conditions listed in paragraph 4 of Accounting Regulations 14:
- lessee acquires ownership of the leased asset at the end of the lease term;
- lessee has the ability and intention to purchase the leased property at a price below its fair value at the acquisition date;
- lease term is the major part of the useful life (operation) of the leased property;
- present value of the minimum lease payments from the beginning of the lease term is equal to the fair value of the leased property or exceeds it. Minimum lease payments include payments payable by the lessee during the lease term, net of tax amount and the value of the lessor’s services, as well as one of two values: guaranteed residual value of property (this is part of the residual value paid by the lessee) if the tenant does not plan to buy the property at the end of the lease term, or the amount that the lessee must pay for the leased property after its deadline, according to the contract of sale;
- leased asset has a special nature, which allows only the lessee to use it without the expense of its modernization, modification, additional equipment;
- lessee can continue the lease asset for a fee much lower than market lease payment;
- lease can be terminated by the lessee, which should reimburse losses from the termination of the lease to the lessor;
- profits or losses from changes in the fair value of the leased property at the end of the lease term belong to the lessee.
It should be also remembered that the land plots and other natural objects, integral property complexes of companies and heir separate subdivisions (branches, segments, areas) could not be the leased property (sec.2 of Art.3 of the Law of Ukraine “On Financial Leasing” of 16.12.1997, № 723/97-ВР).
Accounting for the lessor
Property transferred to financial lease should be reflected in the accounting of the lessor as the lessee receivables. At the same time the residual value of the lease property, which is deducted from the balance of the lessor at the time of transfer of a financial lease should be reflected as other expenses (cost of sold noncurrent assets). The composition of income includes income from sale of noncurrent assets and financial income, which should be received by the lessor (paras.10, 11 of Accounting Regulations 14).
Finance income should be allocated to accounting periods over the lease term using the lease rate of interest on the receivable balance of the lessee (that is, on the balance of the unpaid amount of the financial leased property) at the beginning of the reporting period. The lease rate of interest is the interest rate at which the present value of the minimum lease payments and unguaranteed residual value to be equal to the fair value of financial leased property at the beginning of the lease term.
In order to calculate the financial income, it could be used the methods for determining the number of days, which to be used by banks calculating interest income (para.1.18 of sec.III of the Rules of accounting of income and expenses of banks of Ukraine approved by the NBU Board Resolution of 18.06.2003, № 255):
- method of “fact/fact” provides that the actual number of days in a month and a year to be used for the calculation;
- method of “fact/360” provides that the actual number of days in a month, but conditionally 360 days in a year to be used for the calculation;
- method of “30/360” provides that conditional number of days in a year - 360, in a month – 30 to be used for the calculation.
The property intended to be transferred into the financial leasing, should be accounted for on subaccount 286 “Noncurrent assets and disposal groups held for sale”.
Debts on property transferred into financial leasing, should be reflected on subaccount 181 “Debts on property transferred into financial leasing” by the lessor.
Accounting for the lessee
According to paragraph 5 of Accounting Regulations 14, the lessee should reflect the leased property as an asset and simultaneously as a liability at the lower assessment at the beginning of the lease term: fair value of the asset or the present value of the minimum lease payments. In other words, the lessee places the financial leasing property on the balance sheet and depreciates it. This is the main difference of accounting between the finance lease and operation one.
Depreciation of financial leasing property should be accrued during the period of the expected use of the asset (para.7 of Accounting Regulations 14).
The period of the expected use of the financial leasing property is the useful life (if the contract provides for the transfer of ownership of the asset to the lessee) or the shorter of the two periods - the lease term or the useful life of the financial leasing property (if it is not provided the transfer of ownership of the financial leasing property at the end of the lease term).
The difference between the amount of the minimum lease payments and the value of the leased property, at which it was reflected in the accounting of the lessee at the beginning of the lease term, is the financial expenses of the lessee.
Expenses incurred by the lessee on improving the financial leasing property should be reflected as the capital investment.
Calculations of finance lease should be reflected on subaccount 531 “Finance lease liabilities” by the lessee.
