How to account for fixed assets under finance leases and operating leases

This article will share: What is asset leasing? Leasing cases as well as how to account for depreciation of fixed assets under financial leases and operating leases.

I. What is property leasing? In what cases is property leasing required?

1. Concept

Leasing property is when the property owner transfers the property to the lessee for use for a certain period of time. The lessee can only use the property for an agreed period of time and must pay rent for that property.

2. There are 2 cases of leasing fixed assets

2.1. Financial leasing

It is an activity in which a business leases fixed assets in which the lessor not only transfers the right to use but also transfers most of the risks and benefits as well as ownership of the assets to the lessee.

Some signs to identify leasing activities classified as financial leasing:

• At the end of the lease term, the lessor will transfer ownership of the asset to the lessee;
• The contract has a provision that after the lease term expires, the lessee has the right to purchase the leased asset at a price estimated to be lower than the fair value of the asset;
• The lease term of the asset is long and covers the majority of the asset’s useful life;
• The initial minimum lease payment represents a substantial portion of the value of the leased property.

2.2. Operating lease

Operating lease is a conventional asset lease in which the lessor grants the lessee only the right to use the asset and is usually a short-term lease.

2.3. Comparison between financial leasing and operating leasing

➤ About the characteristics

 

➤ Commonly applied asset types

 

➤ Rental period

 

➤ Accounting method

 

II. Accounting for operating leased assets

1. For the asset lessee

➤ Case 1: Case of prepaying rent for multiple periods.

• The accountant determines the amount of prepaid rent payable:
  • Debit account 242: Fixed asset rental cost paid in advance for many periods;
  • Debit account 133: Deductible VAT (if any);
  • There are accounts 111, 112, 331…: Total payment amount.

• Each period, accountants allocate fixed asset rental fees to expense items corresponding to the purpose of use:
  • Debit accounts 627, 641, 642: Value of fixed asset rental costs during the period (according to Circular 200);
  • Debit accounts 154, 642: Value of fixed asset rental costs during the period (according to Circular 133);
  • Credit account 242: Value of fixed asset rental costs during the period.

➤ Case 2: In case the unit pays rent periodically.

Accountants determine the amount of rent paid periodically, record the rent expense in the expense item corresponding to the purpose of use of the asset, and account as follows:

• Debit accounts 627, 641, 642: Value of fixed asset rental costs for one period (according to Circular 200);
• Debit accounts 154, 642: Value of fixed asset rental costs for one period (according to Circular 133);
• Debit account 133: Deductible VAT (if any);
• There are accounts 111, 112, 331…: Total payment value.

2. For fixed asset leasing units

2.1. Accounting for direct costs related to asset leasing activities

➤ Case 1: Direct costs incurred in a period.

• Debit account 627: General production costs excluding value added tax (according to Circular 200);
• Debit account 154: Unfinished production and business costs excluding VAT (according to Circular 133);
• Debit account 133: Deductible value added tax (if any);
• There are accounts 111, 112, 331…: Total payment amount.

➤ Case 2: Direct costs related to multiple periods.

• When costs arise, accounting records;
  • Debit account 242: Prepaid expenses for many periods must be allocated without value added tax;
  • Debit account 133: Deductible value added tax (if any);
  • There are accounts 111, 112, 331…: Total payment amount.

• Periodically, the accountant shall allocate the initial direct costs related to the unit’s operating lease in accordance with the recognition of operating lease revenue as follows:
  • Debit account 627: Production costs (according to Circular 200);
  • Debit account 154: Production and business expenses (according to Circular 133);
  • Credit account 242: Prepaid expenses.

2.2. Accounting when the unit collects operating lease payments

➤ Case 1: Accounting for the unit that collects periodic operating lease payments.

In case the unit calculates VAT payable according to the deduction method:

• Accounting records when the company issues invoices for payment of fixed asset rental: 
• Debit account 131: Total amount receivable from customers;
• Credit account 511: Rental value excluding VAT;
• Credit account 33311: Output value added tax. 
• Accounting records when the company receives money from customers: 
• Debit accounts 111, 112…: Total value of receivables from customers;
• Credit account 131: Total amount receivable from customers.

In case the VAT calculation unit must pay by direct method:

• Accounting when issuing invoices for property rental payments: 
• Debit account 131: Total value of receivables including value added tax;
• Credit account 511: Total receivable value including value added tax.
• Accounting records when the unit receives money: 
• Debit accounts 111, 112…: Total value of receivables from customers;
• Credit account 131: Total amount receivable from customers.
• Periodic accounting reflects the amount of VAT payable to the tax authorities: 
• Debit account 511: Value added tax payable;
• Credit account 33311: VAT payable.

➤ Case 2: Accounting for the unit collecting operating lease payments for multiple periods.

In case the unit calculates VAT payable according to the deduction method:

• Accountants when determining the amount of tax collected: 
• Debit account 111, 112, 131…: Total value of money received in advance from customers;
• Credit account 3387: Unrealized revenue excluding value added tax;
• Credit account 33311: Output value added tax.
• Periodically, accountants transfer unrealized revenue of the period and record: 
• Debit account 3387: Unrealized revenue in the period;
• Credit account 511: Revenue from providing services and goods.
• When the fixed asset lease contract is suspended and not continued or the implementation period is shorter than the period for which the advance payment has been collected (if any), the amount to be returned to the customer is recorded as follows: 
• Debit account 3387: Unrealized revenue excluding value added tax;
• Debit account 33311: Output value added tax;
• There are accounts 111, 112, 3388: Value of amount paid or remaining to be paid to customers.

In case the VAT calculation unit must pay by direct method:

• Accountant when determining the amount of rent received: 
• Debit account 111, 112,131…: Total value of money received in advance;
• Credit account 3387: Total amount received in advance.
• Periodically, accountants transfer revenue in the accounting period as follows: 
• Debit account 3387: Unrealized revenue;
• Credit account 511: Revenue from providing services and goods.
• When the asset lease contract has not been continued or the performance period is shorter than the period for which the advance payment has been collected (if any), the accountant records the amount to be returned to the customer as follows: 
• Debit account 3387: Unrealized revenue including value added tax;
• There are accounts 111, 112, 3388: Value of money paid or still payable by customers.
• Periodically, accounting reflects the amount of value added tax payable as follows: 
• Debit account 511 – Sales revenue and service provision;
• Credit account 33311: Output value added tax.

2.3. Accounting for depreciation of fixed assets for operating lease into production and business expenses

Periodically, accountants calculate and depreciate fixed assets for operating lease into production and business expenses, recording:

• Debit account 627: General production costs (according to Circular 200);
• Debit account 154: Production and business costs in progress – depreciation according to fixed assets (according to Circular 133);
• Credit account 214: Depreciation value of fixed assets for operating lease.

III. Accounting for financial leased fixed assets

1. Accounting for financial leased fixed assets for the lessee

➤ Accounting for costs related to financial leased fixed assets.

Direct costs incurred initially related to financial leased fixed assets before receiving the leased assets such as: costs during negotiation, when signing the contract… accountants must record:

• Debit account 242: Value of expenses payable;
• There are accounts 111, 112…: Value of various expenses payable. 

➤ Accounting for financial lease payments in advance or deposits to secure the lease of assets.

• Debit account 3412: Prepaid rent;
• Debit account 244: Deposit and bet amount;
• There are accounts 111, 112…: Total value of payable amount.

➤ When the Enterprise receives fixed assets for financial leasing, based on the asset lease contract and other relevant documents reflecting the value of fixed assets for financial leasing at the price excluding input VAT, the accountant records:

• Debit account 212: Value of fixed assets for financial lease at price excluding VAT;
• Credit account 3412: Value of fixed assets for financial lease at price excluding VAT.

➤ The initial direct cost value related to financial leasing activities is recorded in the original price of financial leasing fixed assets, accounting for:

• Debit account 212: Value of initial related direct costs;
• Credit account 242: Direct costs paid before receiving the handover of assets;
• There are accounts 111, 112…: Initial direct related costs.

➤ Periodically, when the enterprise pays the principal and interest to the lessor, account for:

• Debit account 635: Value of rental interest paid this period;
• Debit account 3412: Value of principal debt paid this period;
• There are accounts 111, 112…: Amount of money payable.

➤ When a business receives an invoice from the lessor requesting payment of input VAT, there are 2 cases that can occur:

• Case 1: In case VAT is deductible, accounting:
  • Debit account 1332: Deductible VAT value;
  • Credit account 112: Amount payable immediately;
  • Credit account 338: Input VAT value payable to the lessor. 
• Case 2: In case input VAT is not deductible, the accountant records:
  • Debit account 212: Value of fixed assets for financial lease (VAT payment is made once at the time of recording fixed assets for financial lease);
  • Debit accounts 627, 641, 642: Amount payable (periodically paid upon receipt of invoice);
  • Credit account 112: Amount payable;
  • Credit account 338: Input VAT value payable to the lessor.

➤ When the enterprise has to pay a commitment fee for using capital payable to the lessor of fixed assets, account for:

• Debit account 635: Capital commitment fee payable;
• There are accounts 111, 112…: Capital commitment fee payable.

➤ When the lessee returns the leased fixed assets according to the provisions of the lease contract, the accountant records a decrease in the value of the leased fixed assets, accounting for:

• Debit account 2142: Depreciation value of fixed assets;
• Credit account 212: Depreciation value of fixed assets.

➤ When the lessee only leases a part of the asset value and then buys it back, when receiving the asset, the accountant records a decrease in financial leased fixed assets and an increase in tangible fixed assets, accounting for:

• Debit account 211: Value of tangible fixed assets;
• Credit account 212: Remaining value of financial leased fixed assets;
• There are accounts 111, 112…: Value of additional amount to be paid.

➤ At the same time, accounting for depreciation value transfer, accounting records:

• Debit account 2142: Depreciation value of financial leased fixed assets;
• Credit account 2141: Depreciation value of financial leased fixed assets.

2. Accounting for financial leased fixed assets for the lessor

➤ When handing over fixed assets to the lessee, account for: 

• Debit account 228: Value of leased fixed assets;
• Debit account 214 (2141, 2143): Depreciation value of fixed assets (if any);
• Credit account 211, 213: Original value of leased fixed assets;
• Credit account 241: Value of completed construction transferred to lease (for assets in the construction phase).

➤ Periodically (monthly, quarterly, annually) according to the lease contract, the accountant reflects the rental income during the period (both principal and interest):

• Debit account 111, 112, 1388…: Total amount received from the lessee;
• Credit account 711, 511, 515: Amount received from leasing fixed assets;
• Credit account 3331 (33311): VAT payable.

At the same time, the accountant determines the value of the leased assets that must be recovered during the investment process of each period.

• Debit account 811: Value of recovered fixed assets;
• Credit account 228: Value of recovered fixed assets.

➤ If the lessor sells the asset to the lessee before the expiration date or when the lease expires. 

• Accounting reflects the revenue from asset transfer:
  • Debit account 111, 112, 131… Value of revenue;
  • Credit account 711: Value of revenue received.
• Accounting reflects the remaining unrecovered investment capital:
  • Debit account 811: Unrecovered value;
  • Credit account 228: Unrecovered value.

➤ If the lessor receives the asset back at the end of the lease term, based on the re-evaluated value (if any), account for:

• Debit account 211, 213: Revaluation value or remaining value;
• Debit account 811 (or credit account 711): The difference between the unrecovered fair value and the re-evaluated value;
• Credit account 228: Unrecovered value of assets.

IV. Questions on how to account for fixed assets under financial leases and operating leases

1. Can a business sell fixed assets and lease them back?