Hi,

re: Finance lease

Just wondering who should claim CA, the lessor or lessee?

Anyone had the weekend taught course with BPP? looks like CH11 lecture example 2 says the lessor should claim CA but I thougt as a finance lease the asset should be de-recognised from the lessor's b/s and hence the lessee claims CA?

Thanks very much

Yes you are right as far as Accounting principles are concerned.

but for taxation purposes the ICTA(Income and Corporation Taxes Act) says that there is nothing so called "Finance Lease" in Taxation principles any type of lease should be classified as Operating lease for taxation principles.

Regards,

Muhammad Amir

Im not sure what the answer is but I would have gone with your logic. The lessee takes on all rights and responsibilities for the asset and the lessor no longer holds that asset on their books. I would assume the lessee took on the capital allowances.

The guy who answered before though seems to know a lot.

well ya he knows a lot! he is right if u need a confirmation. capital allowance is a taxation term. te depreciation on the asset is claimed by the lesse in the lesse's books and the asset is not carried on the lessor's books in a finance lease. but in taxation, te asset is owned by a person as long as the title has not passed from him to another person. that is the "legal form" of te transaction. so te lessor claims capital allowances. but in financial statements you use "substance over form". so te substance of te transaction is tat te lesse has all the risks and economic benefits related to the asset and normally duration of finance leases equals or almost equals the useful economic life of the asset. basically the lesse has the full control of the asset. this is the reason why assets under finance leases r included in the lesse's books and not in the lessor's books. so the depreciation on the asset is recognised against profit/loss of the lesse.

so conclusion is the "substance" of the transaction is used in financial statements to present a more true and fair view whereas in taxation the "legal form" of the issue is recognised. therefore capital allowance on the assets on finance leases are claimed by the LESSOR!

muku

Seems like a pointless question as it's not going to be examined. I suppose I'll know it now though if it ever turns up in my job (which it wont!!).

depend on individual country tax system.. but i really feel that tax people got their own set of rule... they are more incline toward cash flow... tax is already so much of a rules.. dun think they wana burst their brain to get involve in stuff like substance over form. i dun think they care. lessor should get CA in my opinion.