Finance lease and Reducing balance: Difference between pages

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A finance lease usually involves the lessee (user of the asset) paying - over the life of the lease - the full cost of the asset plus a return on the finance effectively provided by the lessor.
1.
 
The lessee-user effectively retains substantially all the risks and rewards of ownership.
However, the lessee does not obtain legal title to the leased asset.


Accounting standards require finance leases to be accounted for 'on balance sheet' by the user of the asset.
A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


This means that the liability to pay (the capital element of) the future lease instalments is recognised and disclosed on the face of the balance sheet.


'''Example'''


Relevant accounting standards include IAS 17 and Section 20 of FRS 102 which incorporates practice from the former SSAP 21.
A fixed asset has a cost of $12m,


to be depreciated on a reducing balance basis at a rate of 40% per year.


Finance leases are also known as ''capital leases'', especially in the US.


The depreciation charge for Year 1 would be:


== See also ==
= $12m x 40%
* [[Actuarial method]]
 
* [[Finance charge]]
= $4.8m.
* [[Hire purchase]]
 
* [[IAS 17]]
 
*[[FRS 102]]
The net book value at the end of Year 1 (and the start of Year 2):
* [[SSAP 21]]
 
* [[Implied rate of interest]]
= 12 - 4.8
* [[Lease]]
 
* [[Off-balance sheet finance]]
= $9.2m.
* [[Operating lease]]
 
 
The depreciation charge for Year 2:
 
= $9.2m x 40%
 
= $3.68m.
 
 
The net book value at the end of Year 2 (and the start of Year 3):
 
= 9.2 - 3.68
 
= $5.52m.
 
 
And so on.
 
Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).
 
 
2.
 
''UK tax.''


UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.




===Other links===
== See also ==
[http://www.treasurers.org/node/8924 Students: A Lesson on leases, The Treasurer, April 2013]
* [[Depreciation]]
* [[Straight line]]
* [[Sum of the digits]]
* [[Writing down allowance]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Corporate_finance]]

Revision as of 12:35, 18 March 2015

1.

A basis of allocating costs or allowances across successive time periods by applying a consistent periodic percentage charge to - for example - the reducing net book value of a fixed asset.


Example

A fixed asset has a cost of $12m,

to be depreciated on a reducing balance basis at a rate of 40% per year.


The depreciation charge for Year 1 would be:

= $12m x 40%

= $4.8m.


The net book value at the end of Year 1 (and the start of Year 2):

= 12 - 4.8

= $9.2m.


The depreciation charge for Year 2:

= $9.2m x 40%

= $3.68m.


The net book value at the end of Year 2 (and the start of Year 3):

= 9.2 - 3.68

= $5.52m.


And so on.

Using a reducing balance basis of depreciation, the net book value never falls to zero (unless the asset is disposed of).


2.

UK tax.

UK Writing Down tax Allowances are normally available to be claimed on a reducing balance basis.


See also