Regulations on Accounting of Leasing Transactions
Accounting and preparation of financial statements in Ukraine are governed by the Law “On Accounting and Financial Reporting” , as well as the national accounting standards developed on the basis of and complying with international accounting and reporting standards. These standards set forth principles and methods related to accounting and preparation of financial statements.
Two most important national standards for accounting of leasing transactions in Ukraine are as follows:
- Accounting provision (standard) 14 «Rent» (AP 14), which is the equivalent of International Accounting Standard 17 «Leasing» 17;
- Accounting provision (standard) 7 «Fixed assets» (AP 7), which is the equivalent of International Accounting Standard 16 “Property, Plant and Equipment”.
Notions of Financial and Operating Leasing
AP 14 defines financial lease (hereinafter referred to as financial leasing) as the one that provides for the transfer to a lessee of all risks and benefits associated with the right of use and possession of an asset. Leasing is deemed financial if there is at least one of the attributes listed below:
1) A lessee acquires the title to leasing asset upon the expiration of the term of leasing.
2) A lessee has an opportunity and intention to purchase the leased asset for price lower than its fair value as of the date of purchasing.
3) The term of leasing makes a bigger part of useful life period (exploitation) of leasing asset.
4) Current value of minimal lease payments (hereinafter referred to as leasing payments) from the beginning of the term of leasing is equal or exceeds the fair value of leasing asset.
Operating lease (hereinafter referred to as operating leasing) is defined as other than financial.
Accounting of Financial Leasing
In the event of financial leasing, according to AP 14, a lessee reflects the leased asset as an asset and, at the same time, as a liability at the lowest price as of the beginning of the term of leasing: the fair value of asset or current value of total minimal leasing payments. A lessee also accrues depreciation on this asset during the term of its expected use.
The following is deemed to be the term of expected use of leasing asset:
- the duration of its useful life period, if the contract provides for the transfer of title to leasing asset to a lessee;
- the shorter of the two terms – the term of leasing or useful life period, if the transfer of title to leasing asset is not envisaged upon the expiration of the term of leasing.
A lessor reflects the leased asset as receivables of a lessee. At the same time, a lessor removes this asset from the balance sheet and reflects it as a part of other expenditures.
Accounting of Operating Leasing
In the event of operating leasing, a lessee reflects leasing asset on an off-balance account under the value specified in leasing contract. A lessor reflects the value of leasing asset in the balance sheet and accrues depreciation.
Accounting of Leasing Asset’s Depreciation
Depreciation of tangible leasing assets in accounting is performed according to AP 7 . Pursuant to this standard an enterprise – while entering each of fixed assets to its balance sheet – shall independently choose the depreciation method and useful life period of assets. At the same time, the enterprise must take into account capacity and productivity of asset, its expected physical and moral depreciation, legal and other restrictions regarding the term of its us, and other factors.
Pursuant to AP 7, depreciation of fixed assets may be accrued under one of the following methods (methods 2 – 4 are accelerated depreciation methods):
1) Straight-line method.
2) Method of reduction of depreciated/residual value.
3) Method of accelerated reduction of depreciated/residual value.
4) Cumulative depreciation method.
5) Production method.
Unlike international standards (IAS 16), AP 7 allows enterprises, in addition to the foregoing methods, to apply the norms and methods of depreciation stipulated by tax legislation. As a result, all domestic enterprises apply only the norms and methods provided by tax legislation .
Problems of Leasing Accounting in Ukraine
Despite the importance of accounting as a foundation of financial information system of any enterprise, it is not uncommon in Ukraine when enterprises do not practice their accounting properly and focus all their efforts on tax accounting and preparation of tax reports (declarations).
The reasons of improper accounting in Ukraine are as follows:
- National accounting provisions (standards) developed in Ukraine require further revision to eliminate inconsistencies in their formulations and make them more comprehensible for users.
- Developed national standards are not all-sufficient, and call for additional clarification. Methodological recommendations regarding the use of such standards should be developed in Ukraine.
- Despite the requirements of the Law “On Accounting and Financial Reporting in Ukraine”, which Article 1 stipulates that national accounting and reporting provisions (standards) should be in line with the international standards, at the moment there are still a lot of inconsistencies.