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Post Info TOPIC: Tool Hire company


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Tool Hire company
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Hi

Would a Tool Hire company do the bookkeeping of it's "hire stock" of fixed-assets (tools) differently ?


Also,   would the repair/maintenance of the "hire stock" be treated as a Cost Of Sale rather than a business expense ?   confuse

 

 

cheers



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Bob Sharp


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Hi Bob,

Yes, refer to SSAP21 (available on the FRC site) which deals with HP and Leasing from the perspective of both the lessee and lessor.

Repairs are a cost of sale however where a major overhaul is required you also need to bear in mind the FRS15 Tangible Fixed Assets capitalisation criteria.

I'll post again when I get back from the school run with the capitalisation criteria to save you having to read through FRS15 which is one of those that's pretty hard going.

talk later,

Shaun.

P.S. posted in a hurry this morning and didn't reread what I had written. Said expenses where I actually meant cost of sales. Oops, less hast more speed.


-- Edited by Shamus on Thursday 20th of May 2010 08:37:27 AM

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Shaun

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Right, bit more time to answer now.

As you know there are two different sorts of lease, finance leases and operating leases. The difference is in where the risk and reward of ownership lies.

1) Finance leases & HP contracts

With these the risk and reward of ownership passes to the lessee.

Even though ownership hypathetically remains with the leasing company the reality is that the ownership of the asset has really transferred to the lessee. This is a case of substance over form.

In the Lessee's books the leased asset is recorded as a fixed asset with an associated liability recorded for the remaining finance.

In the lessors books the asset is excluded from the fixed asset register and the outstanding balance is a debtor.


2) Operating Leases

With these the risk and reward of ownership remains with the lessor.

In the Lessee' book the lease is an expense

In the lessors books the asset is capitalised and depreciated over the assets estimated useful economic life.


3) Sale and Leaseback

This is a form of off balance sheet financing.

In essence the company sells the asset to a finance company who leases it back.

The test for risk and reward of ownership needs to be applied to determine whether the transaction was in reality a sale or in fact a securitised loan.

This area is probably beyond your current studies but it doesn't hurt to know that exceptions to the rules exist.


4) Maintenance of hire stock

Again this needs to be part of the risk and reward test. Who does the maintenance? If the Lessor then it's pretty certain that this is an operating lease as the risk remains with the lessor rather than passing to the lessee.

In the lessors books generally repairs and maintenance are a cost of sale. However, FRS15 capitalisation criteria also need to be applied to determine whether a repair is in fact a part replacement warranting capitalisation and seperate depreciation.

Such an example would be a engine on an aeroplane which has a different life expectancy to the plane itself.

The FRS15 capitalisation criteria are :

a) Where economic benefits of an asset are enhanced in excess of the previously assessed standard of performance.

b) Where a component of an asset treated separately for depreciation purposes is replaced or restored.

c)Where related to a major inspection or overhaul that restores economic benefits that have already been consumed and reflected in depreciation. (effectively a reset of the depreciation clock).

So, general rule, where not capitalised expenditure on repairs and renewals is a cost of sale.

Hope that this helps,

Shaun.

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Shaun

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Hope you don't mind Bob, I have a couple of questions for our venerable guru, tied up with leases and aspects of capitalisation

Morning Shaun

Q1 is, how would you class a leased vehicle that is not on a maintenance lease, in  other words the lessee is responsible for all running costs but after a fixed term the vehicle is returned to the leasing company? In this situation the lessee carries the risk of ownership but apparently none of the rewards of full ownership?

Q2 is, in this scenario how would treat a component replacement?
A large agricultural building was purchased ten years ago and came assembled with egg collecting equipment (large extractor fans, conveyor belts, drive motors, full electrical and water instillation, plus one large external feed silo). It was supplied as an assembly, and has a useful life expectancy of 25 years. Should it be treated as a single capitalised asset, or should it have been broken down into its component parts, as it is likely that although the physical structure may well exceed the 25 years,  the motors are more likely to not last as long.

I am just curious as to how you would treat them with an accountants head on.

Bill

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Morning Bill,

good questions (love a challenge).

Q1. Assuming substantially all of the useful economic life of the asset (90%+) is consumed during the lease and that the lease was for more than the lessor book price of the Asset then even though there is no option of ownership the lessee has still consumed the benefit of the asset so it should go through their books as though it was their own asset.

Depreciate down to a residual value of zero as there will be no proceeds on disposal (it will just be collected by the leasing company).

Anything that the leasing company makes on scrapage / disposal will be taken straight to their P&L as profit.


Q2. Break down into major component parts where they have different life expectancies. The building itself may have a 25 year life but the machinery within it would be depreciated over (say) ten years.

This one is a perfect example of the aeroplane case. The engines of an plane are an integral part of the delivered product (it would not be a plane without them) but they are treated as separately depreciated assets.


Bet that the above answers spark more questions!

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Shaun

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Don't worry, I'm sure I will think of more questions soon

"The engines of an plane are an integral part of the delivered product (it would not be a plane without them)" - just a big, heavy, Glider!!

Bill

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Mmm, the 747 glider... I'm guessing that would be aimed squarely at very short haul flights (possibly the other end of the runway).



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Shaun

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....with a very low carbon footprint



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