Every company, in order to produce competitive products, must constantly update its existing fixed assets (hereinafter – FA) (machines, cars, etc.), replace them with newer and more productive. But companies do not always have the free funds to buy new equipment. Therefore, the way out of this situation may be the purchase of FA through a financial leasing mechanism.
Leasing the object
Financial leasing is a type of legal relationship under which the finance lessor undertakes in accordance with the financial leasing agreement for the term and for a fee specified in such agreement, to transfer to the leaseholder in possession and use as an object of financial leasing, or:
- property owned by the finance lessor and acquired without prior agreement with the leaseholder;
- property specially purchased by the finance lessor from the seller (supplier) in accordance with the specifications and conditions established by the leaseholder (Article 1 of the Law of Ukraine “On Financial Leasing” No. 1201-IX of February 4, 2021, hereinafter – the Law on Financial Leasing).
In order to lease property, the finance lessor must enter into a financial lease agreement with the leaseholder.
It is allowed to transfer both purchased on the side and self-produced object to financial leasing from the fixed assets.
If the fixed assets that have already been used in the lessor's activities, or objects specially purchased for transfer to financial lease, are leased the finance lessor must record the leaseholder’s receivables in the amount of minimum lease payments and unsecured liquidation value (ie part of the liquidation value of object of lease, the retention of which is not provided by the finance lessor or is guaranteed only by a related party) less financial income to be received, with the recognition of other income (income from the sale of non-current assets) (item 10 NAS “Lease”).
In addition, at the time of the leased asset transfer, the finance lessor must write off the residual value of the leased asset from the balance sheet to expenses. That is, in the case of a financial lease of a fixed asset purchased from another person, the finance lessor is required to record its sale. At the same time, if the object is transferred to financial leasing:
1) used by the finance lessor as a fixed asset, it must first be transferred to non-current assets held for sale (sub-account 286). To do this, perform the following transactions:
- write off the amount of accumulated depreciation by posting Dt 13 – Kt 10;
- the value of the FA remaining on account 10 (ie the residual value) should be transferred to account 286. That is, the FA must be transferred to non-current assets held for sale. To do this, post Dt 286 – Kt 10.
Depreciated items on sub-account 286 are not depreciated. In this sub-account, the objects are accounted for at the residual value until the transfer to the leaseholder;
2) whichever finance lessor purchased for financial lease, such an object is immediately included in inventories (also on sub-account 286 as a non-current asset held for sale). In addition, it should be accounted for at the initial cost, formed according to the rules provided for inventory, ie taking into account the costs listed in item 9 of NAS 9 “Inventory”.
When fixed assets are transferred, both as used by the finance lessor in its activities and acquired for the purpose of financial leasing, the finance lessor must reflect the sale of such an asset. At the same time, sales transactions should be recorded even if the finance lessor transfers to the leaseholder only two of the three components of ownership of the leased asset (the right to own and use the property, reserving the right to dispose).
To reflect the transfer of FA in a financial lease at the time of transfer of the object to a financial lease, you need:
- recognize income from the sale of such an asset and long-term debt (Dt 181 “Debt for property transferred to financial lease” – Kt 712 “Income from the sale of other current assets”. At the same time recognize income and debt in the amount of minimum lease payments and unsecured liquidation value less financial income (interest payments).
Next, long-term receivables need to be gradually reduced. First, the part of the debt, which will be repaid within the next 12 months, should be transferred to the current receivables record Dt 377 – Kt 181, and then after receiving funds from the leaseholder, this debt should be closed by holding Dt 311 – Kt 377;
- write off the value of the object leased from the balance sheet (Dt 943 “Cost of sold inventories” – Kt 286).
If the FA produced by the finance lessor are leased, ie the objects that are finished products (accounted for on account 26), then in accounting the lessor must:
1) recognize the receivables of the lessee in the amount of recognized income (revenue) from the sale of finished products and the current unsecured liquidation value of the object of financial lease simultaneously with the recognition of income (revenue) from the sale of finished products (item 13 NAS 14). That is it is necessary to post Dt 181 – Kt 701.
At the same time, the producer’s income from the sale of the object of financial lease is recognized according to the lowest of two estimates:
- the fair value of the item;
or
- the present value of the minimum lease payments, calculated at the market interest rate. To calculate the present value of the minimum lease payments, the company must use the formula given in Annex 1 to NAS 14.
It should also be long-term debt at a time when the time of its partial repayment is less than 12 months, part of this debt is transferred to current receivables (Dt 377 – Kt 181), and then it is repaid after receiving funds from the leaseholder;
2) write off the cost of the sold object, reduced by the current unsecured liquidation value, attributed to the increase of the lessee’s receivables. That is it is necessary to post Dt 901 “Cost of the realized finished goods” – Kt 26.
