This is the accounting under IAS 17 and the first method in
the Guidance Notes to SSAP 21.
This accounting method treats the asset as sold and the
profit amortised over the lease term, and then accounts for the
finance lease as a separate transaction. The accounting entries
are:
| £ | |||
| Dr bank | 30,000 | ||
| Cr asset | 25,000 | ||
| Cr deferred income (profit on sale) | 5,000 | ||
| Dr leased asset | 30,000 | ||
| Cr finance lease liability* | 30,000 | ||
| Annual entries in profit and loss a/c in each of Years 6 – 10 | |||
| Debit depreciation of leased asset | 6,000 | ||
| Credit 1/5th x profit on sale of asset (30,000 25,000) | (1,000) |
* The tax legislation generally refers to accounting ‘as a finance lease or loan’ as it might be argued that the finance lease liability is presented as a loan in the accounts.
In other words, the trader is treated for accountancy purposes
as if he had first acquired the asset under a finance lease at the
end of year 5 for £30,000 and that cost is written off over
the remaining five years of useful life; that is, there is a
depreciation charge of £6,000 a year for five years.
Tax consequences
The tax consequences if this accounting treatment is used and
the asset is treated as sold and profit written off are:
If the asset had been sold and leased back for £20,000, there would be a loss on sale of £5,000. The net accounting entry would still have been £5,000 each year (rent/depreciation £4,000 plus loss on sale of £1,000). But the loss on sale should be excluded for tax purposes, leaving only the annual rent (described as depreciation) of £4,000 per annum (£20,000 over 5 years) deductible prior to FA 2004. Following FA 2004, and assuming there was a restricted disposal value under CAA01/S222, the deduction for the rentals will be restricted under CAA01/S228B.
