finance lease or supplier credit

[CBPian]

Supplier credit is capitalised at cost to the buyer whereas a finance lease is capitalised at present value of MLP?
I would appreciate if someone can help me distinguish between the two. How to assess an acquisition, a finance lease or supplier credit?
One thing to note is that supplier is not a leasing company but dont we go by substance over form?


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[Goodman]

you are correct that one has to ascertain the substance of the transaction over legal form. How I would view the situation in hand is as follows

Finance lease, obtain lease documents and establish it is a finance lease and not an operating lease. If you think that the title of asset rest with our client then as you said captalise.

Now supplier credit can be tricky
I would see that whether or not the supplier is offloading the asset becuase they no longer needed it and our client needed the asset. If so whether the offloading is commerically sound (ie new asset is x pounds and we are getting it for x-y pounds) then I might take the view its a genuine transaction.

If the supplier is a poultry farm and they are trying to sell us an asset used to make fans then substance over legal form might necessite this transfer to be treated as something else but asset acquisation. Or our supplier is our bank and they are trying to sell us whisky on a 30 year sale or buy back clause, its definately definately not an sale but a commercial loan transaction.

[CBPian]

Finally someone replied[D]
Well there is no lease document as such.. as the lessor is not a leasing company however they have produced a socalled lease amortisation schedule as part of the purchase documentation. The transaction fulfills the criteria of a finance lease with a bargain purchase option at the end of the loan/lease term.
The merchandise is not irrelevant to the business... but the price is not x-y but x+y --- y being the commercial rate of interest.
The question is.... should we capitalise x+y ...treating it a supplier credit or x-y... treating it a finance lease (remember it fulfills all substantive conditions but is not legally a finance lease)
... from the fair value perspective... i am inclined to say that it should be capitalised at 'x' but we have so many instances of supplier's credit in real life which have implicit financing structures which are simply ignored in accounting.
.. your comments???

[Goodman]

As long as you are satisfied that finance lease exists, the question that seller is not leasing company can be safely ignored.

I am content with your treatment that x (being the cost element) should be capatilised. Decpn charge/appropriate capital allowances.

Now there is a question of x+Y. where y being the interest, correct?

Actually when i referred to x-y, what I was trying to refer was that cost less any discounts. Why discounts? (if it were a second hand machiner). but lets ignore the equation and get back to the scanerio.

the element of Y will be paid over the life time of lease, correct?
if so then we have to find a place in the financial statements to write off the payment. I think it can be safely classified under the heading of "Interest payable and similar charges".

so capital allowances on the cost element + full interest payments will escape tax. if there is tax, obviously.

[smraza]

Salam friends,
In my humble opinion the difference b/w supplier credit and lease is the same as between the 'Car Finance' and 'Car Lease'.

The asset purchased availing the supplier credit will be showned as owned assets, as the ownership remains transferred to the buyer.

So the cost should be recorded with X and Y should be charged to the Fin.Charges being the markup on the borrowing, as in order to make the payment to the supplier we would have borrowed the same amount from any other source,

but in case of supplier credit, the supplier is both 'supplier' and the 'financer'.

SMR

[Goodman]

W Salaam

SMR, where you have been? Long time no see. please keep posting.
I dont see a lot of other friends eg. ASK, GB (Guybrush) etc. Any news?

[smraza]

Thanks for the Concern Zubair, Toooooo much busy, Foreign reviews, various projects, certifications, jumbled up,
and no news about Azeem and GB, the thing which we can do for them, is to pray that whereever they are, they may remain in peace under the showerings of Allah. Aameen.

Take care.

SMR

[CBPian]

thanks goodman/SMR for your replies.
We have agreed to treat at as a finance lease. An additional work we have done is to obtain valuation for the asset to ensure accurate fair value assessment and corresponding interest figure.
I hope too that GB and Azeem are okay.

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