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An Example To Illustrate How To Classify A Lease As Finance Lease

slang — Wed, 02 Dec 2009 14:40:25 +0000

Below example demonstrate how to classify a lease into a finance lease:

Question:

ABC Ltd enters a lease agreement on 1 January 2009 to have the right to use the asset for 10 years. The economic life of the asset is 11 years. The fair value of the asset is $12 million. The lessee agreed to pay $1.6 million annually for 10 years at the beginning of each year. The present value of the minimum lease payment is $10.5 million.

Required: How should the lease be classified?

Answer:

On the inception date 1 January 2009, the lease will be classified as a finance lease due to:

the lease period is 10 years, which is 91% of the economiclife of the asset. Therefore it meets the criteria being the lease forms the major part of the economic life of the assets, even if its title is not transferred
the present value of the minimum lease period is substantially all (87.5%) of the fair value of the asset

The asset will be depreciated over 10 years.

How To Apportion Hire Purchase Interest-Using Sum Of Digit Method Or Rule Of 78 (Part 3 of 3)

slang — Tue, 01 Dec 2009 09:44:47 +0000

Hire purchase interest are apportioned based on the reducing balance method (part 1) and on Straight line basis(part 2).

This final part 3 looks at another commonly used method to apportion hire purchase interest namely the Sum of digit method of Rule of 78

Example to illustrate the Sum Of Digit or Rule of 78 method to apportion hire purchase interest.

Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $3,500. A deposit of $500 is paid and 12 annual installments of $300 being agreed.

	$
Cash Price	3,500.00
Deposit	500.00
	3,000.00
Interest(12 x$300 -$3,000)	600.00
	3,600.00

The installments are numbered as follows:

Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sept	Oct	Nov	Dec	Total
12	11	10	9	8	7	6	5	4	3	2	1	78

The total hire purchase interest of $600.00 is apportioned based on above weight:

Jan	12/78 x$600 =$92.30
Feb	11/78 x$600 =$84.62
Mar	10/78 x$600 =$76.92
Apr	9/78 x$600 =$69.23
May	8/78 x$600 =$61.54
Jun	7/78 x$600 =$53.85
July	6/78 x$600 =$46.15
Aug	5/78 x$600 =$38.46
Sept	4/78 x$600 =$30.77
Oct	3/78 x$600 =$23.08
Nov	2/78 x$600 =$15.39
Dec	1/78 x$600 =$ 7.69
	$ 600.00

How To Apportion Hire Purchase Interest-Straight Line Method (Part 2 of 3)

slang — Tue, 01 Dec 2009 07:55:00 +0000

Part 1 shows the reducing balance method .

This article looks at how the hire purchase interest is apportioned over the period of the agreement using the Straight Line method.

Example to illustrate the Straight line method to apportion hire purchase interest. Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $2,500. A deposit of $500 is paid and 24 annual installments of $100 being agreed.

	$
Cash Price	2,500.00
Deposit	500.00
	2,000.00
Interest(24 x$100 -$2,000)	400.00
	2,400.00
	Nil

Hire Purchase MONTHLY interest is apportioned as follows:-

	$	$	$
	Monthly Installment	Payment of Principal Amount	Payment of Interest Amount
$2,000/2,400 x$100		83.30
$400/2,400 x $100			16.70
	100.00	83.30	16.70

How To Apportion Hire Purchase Interest-Reducing Balance Method (Part 1 of 3)

slang — Tue, 01 Dec 2009 07:51:42 +0000

Note that the hire purchase interest needs to be apportioned over the period of the agreement. The commonly used methods are the Reducing Balance method, Straight Line method and Sum of Digits or Rule of 78 method

Below example illustrate the Reducing Balance method to apportion hire purchase interest:-

Using the Reducing Balance method to apportion hire purchase interest: Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $2,500. A deposit of $500 is paid and 4 annual installments of $631. Interest rate is 10%

	$
Cash Price	2,500.00
Deposit	500.00
	2,000.00
10% interest	200.00
	2,200.00
1st year installment	(631.00)
	1569.00
10 % interest	157.00
	1,726.00
2 nd year installment	(631.00)
	1,095.00
	110.00
	1,205.00
3 rd year installment	(631.00)
	574.00
	57.00
	631.00
4th year installment	(631.00)
	Nil

FRS 112-Reconciliation Of Effective Tax Rate To Statutory Rate

slang — Tue, 21 Oct 2008 04:07:51 +0000

In FRS112 on Income Taxes or IAS 12, there is a requirement for a reconciliation statement between the Effective tax rate (ETR) to the Statutory Rate in the notes to the financial statement wherein the following are normally taken up:

Non allowable expenses
Deferred tax assets not recognized
Expenses not allowed for tax purposes
Non taxable income
Differential tax rate-SME’s ( small & medium enterprise), foreign subsidiaries
Over/under provision for prior years
Changes in tax rates of overseas subsidiaries
Changes in deferred tax due to tax rate changes

The idea of this reconciliation is allow transparency for outsiders/shareholders to understand whats the company has done to manage its taxation namely how much the actual existing taxation rate compared to the norm statutory rate. An excessive variance between ETR versus statutory rate is alarming and should be critically look at. However, sad to say, many of us tend to ignore or take lightly of such review of the reconciliation.

My two cents is that whether you are an accountant, financial controller or CFO or top management, we should look at this reconciliation more carefully

Why is this so?

Effective tax rate (ETR) is very important. In my earlier article on Economic value added (EVA), it is mentioned that ETR is one way to improve EVA as ETR is an outright cash flow where, when we manage to plan it carefully, will increase shareholder value / EVA.

Deliberate investment in tax exempted industrial areas, looking ahead to plan for future material non-allowable expenses into allowable type, ensuring certain subsidiaries of the group enjoy the SME’s status by making sure the threshold on authorized capital not exceeded, might be some suggestions to reduce ETR

So look out carefully this reconciliation in your company’s notes to the financial statement and please plan ahead to try to lower ETR to enhance company’s shareholder value. Incidentally, one part of the kpa/kpi of an inhouse tax manager is to reduce the ETR of the group/company.

What is Timing Difference in Tax and Timing Differences Versus Permanent Differences

slang — Sun, 14 Sep 2008 15:30:51 +0000

As the taxable profit is computed based on taxation laws which differ from the accounting policies applied to determine the accounting profit, hence the taxable profit and accounting profit can differ. The difference between taxable profit and accounting profit can be classified into:

permanent differences
timing differences

This articles looks at the aforesaid differences and their impact on tax

Permanent differences:

Are those differences between taxable profit and accounting profit for a period which originate in the current perio and DO NOT reverse in the subsequent periods. For example, the tax law allow only a part of an item of expenditure, the disallowed amount would result in permanent difference
The impact:-as this type of difference does not reverse in subsequent period(s), their impact on the amount of taxes to be changed in the statement of profit and loss of the current period is not measured and accounted for.

Timing Differences:

those differences between taxable profit and accounting profit for a period which arise because the period in which some items or revenues and expenses are included in taxable profit do not coincide with the period in which such items of revenues and expenses are included or considered in arriving at accounting profit. Example:interest on securities is included in accounting profit on time proportion basis but the same is taxable profit at the time it is due.
note that the total of these revenues included in accounting profit and taxable profit ultimately be the same, but periods of inclusion differ.
The impact:-timing differences are adjusted for tax amount to be charged against the revenue of the appropriate period should be measured and accounted for.

ACCA and MICPA sign Mutual Recognition Agreement(MRA)

slang — Mon, 08 Sep 2008 16:04:22 +0000

At a ceremony on August 13, 2007 at Le Meridian Kuala Lumpur attended by Dato’ Nordin Baharuddin , MICPA President and Mrs Gillian Ball, ACCA President, a Mutual Recognition Agreement (MRA) was signed by The Malaysian Institute of Certified Public Accountants (MICPA) and ACCA (the Association of Chartered Certified Accountants) with the following details:

provides a route for members of both MICPA and ACCA to join the other body, and enjoy the benefits which both respected designations can offer.
ACCA is the world’s largest and fastest-growing professional international accountancy body with 296,000 students and 115,000 members based in 170 countries.
MICPA is an established professional accountancy body with technical excellence. It has over 3,000 CPAs engaged in public accounting practice and various fields of employment and close to 800 students pursuing the CPA qualification.

Tabulate below:

MUTUAL RECOGNITION AGREEMENT(MRA) SIGNED BETWEEN ACCA & MICPA

For ACCA Members

For MICPA Members

ACCA members may obtain MICPA membership by passing the MICPA Admitting Examination

Alternatively, ACCA members with more than 5 years post-qualification experience can qualify for CPA membership by passing an interview with the MICPA Membership Admission Panel. Upon obtaining CPA membership they will gain a prestigious CPA designation with technical excellence.

MICPA members wanting to gain ACCA membership will have to prepare for and pass ACCA’s Professional Accountant paper, P1, from the final level of ACCA’s examinations.

Alternatively, those MICPA members with more than 5 years post-qualification experience can qualify for ACCA membership by taking the ACCA online Professional Ethics module, a key part of ACCA’s revised 2007 professional syllabus or the ACCA Critical Incident Questionnaire. Upon obtaining the ACCA membership they will gain a globally recognised and portable qualification.

Helen Brand Appointed As New Head of ACCA Global

slang — Fri, 05 Sep 2008 10:20:00 +0000

The Association of Chartered Certified Accountants (ACCA) has appointed Helen Brand as its new chief executive officer effective Sept 1. Brand replaces Allen Blewitt, who returned to after being based at the association’s headquarters in London the last five years.

According to the new CEO:

She aims to maintain ACCA’s position as the lead global accountancy body in terms of reputation and size.
The challenge is to make sure that ACCA stay ahead and achieve its potential. This is because the Association is one of the world’s largest and fastest-growing accountancy bodies with 122,426 members and 325,606 affiliates and students in 170 countries. As at Sept 3, had 33,000 ACCA members, students and affiliates.
The emphasis is very much on the growth in members, not growth in students. What ACCA is most concerned with is that the people who register as students become members and play a role as a full professional accountant.
She attributed ACCA’s popularity to its ability to meet the growing global demand for accountants equipped with a common international standard. More countries are adopting the International Financial Reporting Standards IFRS, which are international accounting standards adopted by the International Accounting Standards Board (IASB). Malaysia plans full convergence with IFRS by Jan 1, 2012. The US looks set to adopt IFRS as well. (Businessweek reported last month that the US Securities and Exchange Commission would allow some companies to report under IFRS as early as 2010 and would require it of all companies by 2014.)
One of the final pieces of the jigsaw is the US adopting the international standards.

(Source: The Edgedaily 5-9-2008

Sale And Leaseback-How To Determine whether it is A Finance Lease or Operating Lease And Accounting Treatment

slang — Mon, 07 Jul 2008 10:46:13 +0000

The following are some criteria to classify a sale and leaseback transaction as an operating lease [IAS17.7-14(R.05)]:

A sale has genuinely occurred, where all major risks and rewards were transferred to the buyer;
The buyer (lessor) cannot transfer the leased asset back to the seller (lessee);
The lessee has no bargain repurchase option and the lessor assumes the exposure to risk that the value of the leased asset will fall
The lessee has no option to prolong the lease agreement at conditions significantly more favourable than the market conditions;
The fair value of assets sold and leased is substantially higher than the present value of the minimum lease payments;
The lessor is more than simply a lender – the lessor’s income and exposure to gain and loss is related to property market conditions (for example, rental prices and property values), not just interest rates.

The transaction should be accounted for as a finance lease if any of the conditions above is not fulfilled.

The commerciality of sale and leaseback transactions between related parties in particular should be considered to determine the appropriate lease classification [IAS17.10,21(R.05)]

Accounting treatment:

If the sale and leaseback is a finance lease:

the arrangement is to be treated as a “loan” arrangementand any gain is to be deferred and amortized over the lease period

If the sale and leaseback is an operating lease:

if the entire transaction is at fair value, the gain or loss on disposal is recognized immediately.

If the sale price is above fair value and the rental is above normal market rental, the excess over the fair value is deferred and amortized over the lease period
If the sale price is below fair value and the future rentals are at below commercial rate, the loss is deferred and amortized over the lease period in proportion to the rental payments.

Characteristic Of Finance Lease

slang — Mon, 07 Jul 2008 10:44:20 +0000

Tabulate below are the characteristic that indicates it as a Finance lease:-

Transfer of ownership at the end of the lease term to a lessee [IAS17.10(a)(R.05)].
The lessee has a bargain purchase option [IAS17.10(b)(R.05)].
The lease term covers the major part of the asset’s economic life [IAS17.10(c)(R.05)].
Payments made by a lessee that are a substantial portion of a leased asset’s fair value might be presumed to give rise to a finance lease
The leased asset is constructed to the lessee’s specification and could not be used by others without significant modification [IAS17.10(e)(R.05)]