FRS 116 Leases – A Closer Look at the Manufacturer or Dealer Lessors

It is common to see manufacturers or dealers provide their customers with the choices of purchasing or leasing an asset. However, according to FRS 116: Leases, the accounting treatments for manufacturer or dealer lessors are a bit different from other lessors in finance leases. Hence, if you are one of them, and you wish to comply with the applicable accounting standards when preparing financial statements, but you have no idea on the correct ways of dealing with them, do not hesitate to contact an accounting firm in Johor Bahru.

At the date of commencement of all the leases, the manufacturer or dealer lessors should recognise the amounts associated with them. Firstly, they need to recognise the revenue as the underlying asset’s fair value. If the present value of lease payments accrued to the lessors is lower, then they should recognise this amount instead. For the latter, they need to discount the present value using the market interest rate.

Besides, the lessor should recognise the cost of sale as the cost. If the cost of sale is different from the carrying amount, the lessor should recognise the carrying amount of the underlying asset, minus the present value of unguaranteed residual value.

Apart from that, recognising the selling profit or loss as the difference between the cost of sale and the revenue is something that a manufacturer or dealer lessor should do on the day the lease commences too. The lessor should do so no matter whether he transfers the underlying asset (Also see How Do Assets and Equity Differ from Each Other?).

In some occasions, manufacturer or dealer lessors may quote artificially low interest rates as they want to attract more customers. However, if they use such rates, they may recognise an excessive portion of their total income on the day the lease commences. So, if the manufacturer or dealer lessors quote artificially low interest rate, they should restrict selling profits to the extent that would be applicable if they charge their customer a market interest rate.

At the commencement date, the manufacturer or dealer lessors should also recognise the expense costs that they have incurred, which is related to getting a finance lease. This is because these expense costs are primarily relevant to earning the selling profit of the manufacturers or dealers. The costs that the manufacturer or dealer lessors have incurred for getting a finance lease are not included in the definition of the initial direct costs. Thus, the net investment in the lease does not consist of these costs (Also see Cost Accounting Basics).