Note from Philip Rosenberg:
Managing Editor: Practical Accountancy Loose Leaf Service
We're pleased to welcome Jan Van Zyl
to the team of accounting experts for the Accounting Bulletin
is a Financial Accountant, and you'll see bulletins from him when we cover topics in his field of expertise.
Today we look at the considerations when you lease a business vehicle. Look out for part 2 in your Accounting Bulletin on Monday 15 Jul
y, where we look at the considerations for buying a business vehicle.
Let's have a closer look at leasing…
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John realised capital comes with a cost, so he decided to lease two delivery vehicles for his small retail company on an operating lease, instead of buying them outright. He realised he could make a much higher return on his investment buying stock with the capital, instead of ploughing it into a depreciating asset.
He leases two vehicles over two years for his sales consultants to travel to various clients. The lease agreement is for two years. He pays R10 000 per month in the first year and in the second year R8500 per month in the second year.
But what is a lease agreement? And how will it benefit your business?
A lease sale agreement
allows you to lease a vehicle from the financier with the option to buy it at the end of the agreement. The main advantage of this type of agreement is that you enjoy the use of the vehicle without outright ownership and the lease payments may be tax deductible.
But there's more than one type of lease. Which one is best?
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John chose the operating lease, because he likes to get new vehicles for his sales guy's every 2 years – to portray the quality of his brand through the presentation of his sales team.
He also loves the inclusion of the maintenance plan that comes with it.
But what is
an operating lease? You pay the owner of the car a regular fee, and the asset never becomes yours. So basically you pay for the use of the vehicle.
John's financial calculations for this operating lease where he paid R10 000 per month in the first year and in the second year R8500 per month in the second year, were in line with IFRS, and looked like this:
The lease payment for the first year is R10 000 per month and in the second year R8500 per month.
The lease covers 24 months. So he calculates (R10 000pm x 12) for the first year + (R8 500pm x 12) for the second year = R222 000 over the 24 months
To work out the average amount over two years he calculates R222 000/24 = R9 250
The R9 250 x 12 month = R111 000 should be reflected in the statement of comprehensive income for the 2 years.
To calculate the difference in first year from the average amount he takes the first year real payment R120 000(R10 000 x 12) – the average amount for the first year R111 000(9 250 x 12) = R9 000.
He accounts for this as a short-term lease asset in the financial statements.
To calculate the difference in the second year from the average amount he takes the second year real payment R102 000 – the average amount for the second yearR111 000 = R9 000 should be credited(deducted) of the short-term lease asset in the financial statements.
But remember, each business has its own scenarios at play, and you'll have to use this information to decide the best options for your business. In the final newsletter of this 2 newsletter series, we'll look at the pro's and con's of buying business vehicles, instead of leasing them.
John chose an operating lease, but you could also choose a finance lease for your business vehicles. A finance lease is like a hire purchase agreement, where you can own the asset at the end of the lease term. Want more information on finance and operating leases? Turn to chapter L01 in your Practical Accountancy Loose Leaf.
Don't have a copy? Click here
to get yours.
Don't forget to keep your eyes open for part 2 of this series next week!
Yours in accounting,
Jan van Zyl
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