Leases - Ledgers & Accounts Configuration

[Danny-Yass]

"Council requires a ledger account for all the IT equipment it purchases prior to transferring to a lease. Can this account be created as a suspense account and the lease payment be paid into it? What affect does it have where the expenditure was raised in one year and the lease reimbursement not received until the next year?"

[ken]

"Council requires a ledger account for all the IT equipment it purchases prior to transferring to a lease.

Hi Danny,

You certainly need to use some specifc account to keep track of these costs prior to receiving the lease funds. So it makes logical sense to have an isolated account - where it sits, at what point in time you get reimbursed the funds and how you classify the Lease are all then very relevant for the rest of your query!!

"Can this account be created as a suspense account and the lease payment be paid into it?

Generally & I think it's covered in the LG Regulations, Council cannot spend money unless there is an approved budget (I'll try & get the reference for this).

So you need to be careful in expending in advance of getting a lease if this is not in your adopted budget - ie. unless you have a specific Budget Expenditure item for say "Equipment Purchases under Lease" and an Income Iitem for "Lease Funds Receivable", then you might strictly not be in accordance with the LG Act!!

In this scenario above, you would not be able to net the lease receipt off with the expenses in one account but would nedd to gross them out.

This would be the case anyway if the lease was classed as a Finance Lease - since Council would classify the expense account as a Non Current Asset (PP&E) and the Income Account as a Non Current Finance Liability!!

If you netted the Expense & the Income together, you would in effect not have any GL account balances and so in that case I assume you would be classifying the arrangement as an operating lease - albeit I think this classification is highly unlikely given the facts & in most cases the L/T use of Equipment under a Lease agreement will usually in fact be a Finance Lease!!

"What affect does it have where the expenditure was raised in one year and the lease reimbursement not received until the next year?"

The issue of the expenditure in one year and the lease funds being received by Council in the next year and how to account for this at YE & dislcose this correctly in the YE Accounts depends on whether you are classifying the expenditure (and lease agreement) as a Finance Lease or an Operating Lease.

If you are classifying it as a Finance Lease, then the Expenditure in Advance should be shown in Note 9 as a PP&E Purchase (Leased Assets) and you should raise the budget "income" via a debtor (against a Finance Lease Non Current Liability) for the value of the PP&E exp which represents the funds you are going to get in during the next Financial Year. This way, Current Assets is down on Cash but up on Debtors fora neutrl effect on Working Capital!!

If you are classifying the funds (and use of the assets) as an Operating Lease, then the Expenditure as at 30/6 can sit in Balance Sheet as a Current Asset - say "Receivables" or perhaps "Expenditure in Advance", but my prefernece would be "Receivables" being the amount of money the lease company will pay you for purchasing the assets in advance for them!! Again in this senario, Current Assets are unaffected by the expenditure since the value is sitting as a Current Asset anyway!

FYI - we covered the whole issue of classification of Leases and "crunching the numbers" on assessing the Value for Money (and effective interest rates Council is getting charged for lease agreements) as opposed to Council borrowing the funds themsleves in the August 2005 edition of LG "Debits & Credits": Best Practice Guide Leases - Finance & Operating, accounting, approval and determining the real cost.

Our belief is that "best practice" in relation to any decision of Council to lease equipment on a long term basis (whether under a Finance or Operating Lease Contract ) should only be taken after due consideration & analysis of the numbers and under a sound cost/benefit review of the alternatives and NPV's of each alternative!

[bjenkins]

In the interests of this being a discussion page I thought it worthwhile to seek clarification on the issue of raising income in advance of leasing.

I would assume if there was an arrangement to lease, the lease agreement and terms would begin at the point funds are received, if this was post EOY what is it that allows such the revenue to be brought to account? If you don't have an agreement and it is merely intent to fund the purchase through leasing is there still a capacity to raise the revenue? This reminds me of the old local government “expenditure in anticipation of loans" which I had thought disappeared with AAS27.

In the case of operation leases, I had thought the transaction required in the future period would be a sale and leaseback. As we were almost in this situation I had come to the conclusion we would hold the assets as "held for sale", which in effect gives the same result.

[ken]

Hi Brian,

FIrst up - thanks for your input into this Topic!

You're dead right - the Web Forum is all about harnessing collective view points...not just LG Solutions view point and so the more that users participate in Topics & Discussions, the more we can reach a concensus view that takes into account all the relevant issues & all the possible solutions!!


Secondly...You've made some good points and so I'll provide my response ASAP when I find a quiet 5 mins in the next day or two!!

In the mean time, if anyone else has some input...please post a reply when your ready!