Question Tag: Finance lease

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 7 Marks

FR – Nov 2019 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculation and accounting entries for lease under IFRS 16 in the financial statements of Asawase Ltd.

On 1 August 2018, Asawase Ltd entered into an agreement to acquire a motor vehicle. The terms of the agreement were that the vehicle would be leased for five years from the date of inception, subject to a deposit of GH¢19,972 and five annual payments of GH¢6,500 in advance, commencing on 1 August 2018. The fair value of the vehicle and the present value of the lease payments were GH¢48,000 at inception. The interest rate implicit in the lease is 8%.

Required:
In accordance with IFRS 16: Leases, show with appropriate calculations, the accounting entries required to record the transaction in the financial statements for the year ended 31 July 2019. (7 marks)

c) Workings
Initial recognition & measurement:

Journal:

Closing balance on lease obligation (21,528 + 1,722) GH¢23,250
Presented as current liability (full payment as it is in advance, due 1 August 2019) GH¢6,500
Presented as non-current liability GH¢16,750
Extracts from financial statements for year ended 31 July 2019:
Statement of Profit or Loss for year ended 31 July 2019:

Correct entries in the Workings Schedule – 4 marks 6 correct entries in the financial statements extract – 3 marks

  • 6 Marks

FR – Nov 2016 – L2 – Q2a – Financial Reporting Standards and Their Applications

Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

You are employed as the Financial Accountant for Asokwa Ltd. Asokwa Ltd leased a new piece of equipment from Amakom Ltd for three years commencing on 30 September 2014. The fair value of the equipment is GH¢70,000. A deposit of GH¢4,000 was payable on 30 September 2014 followed by six half-yearly payments of GH¢13,500, payable in arrears, and commencing on 31 March 2015. Asokwa Ltd allocates finance charges on a sum of the period digits basis.

Required:
Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

Calculation of finance charge

  • 8 Marks

PT – July 2023 – L2 – Q4b – Corporate Tax Liabilities

Advice on the tax implications of setting up as a subsidiary vs permanent establishment, finance leasing, and paying employees.

The management of Chika Plc, a United Kingdom (UK) based Company, is considering the possibility of launching its presence into Ghana and it is not too sure of the tax implications of the following in light of the tax laws of Ghana:

i) It is considering making its presence through incorporation in Ghana or creating an external company that is a Permanent Establishment (Branch) instead.
ii) It intends to acquire all its non-current assets through finance lease as against buying the assets outright when it makes its presence in Ghana.
iii) It intends to bring some staff from the UK to work in Ghana who will be paid half salary in Ghana and the other half paid directly to their accounts in the UK.

Required:
Advise on the tax implications of each one of them to enable management of Chika Plc to take a decision. (8 marks)

i) Incorporation vs Permanent Establishment (PE)

  • Subsidiary: Liable to Ghanaian corporate tax on worldwide income, dividends are taxed at a final withholding rate of 8%, but no branch profit tax.
  • PE (Branch): Liable to Ghanaian corporate tax on Ghanaian-source income only, and subject to an 8% branch profit tax.

ii) Finance Lease vs Buying Assets

  • If Chika Plc uses a finance lease, the principal portion of the lease payments will qualify for capital allowance, and the finance charges are tax-deductible as expenses.
  • If Chika Plc buys the assets outright, it will be entitled to full capital allowance on the cost of the assets in the year of acquisition.

iii) Staff Payment

  • The full salary earned by the UK staff working in Ghana will be taxed in Ghana, regardless of whether part of it is paid in the UK. They will be considered residents for tax purposes if they stay in Ghana for 183 days or more.
  • 10 Marks

AT – Nov 2018 – L3 – Q3a – Permanent establishment, International taxation

Tax policy implications on the establishment of a permanent entity, finance lease acquisitions, and dividend policies by a foreign company.

The management of Smith Plc, a UK-based company, is considering the possibility of launching its presence in Ghana and it is not sure of the tax implication of the following under the tax laws of Ghana:

i) It is considering making its presence through incorporation in Ghana or creating an external company that is a Permanent Establishment (Branch) instead.
ii) It intends to acquire all its non-current assets through finance lease as against buying the assets outright when it makes its presence in Ghana.
iii) It intends to bring some staff from the United Kingdom to work in Ghana who will be paid half salary in Ghana and the other half paid directly to their accounts in the United Kingdom as against paying their full salary in Ghana.
iv) Management intends to acquire shares in many companies in Ghana as part of efforts to create value for shareholders through dividend receipts as against granting loans to interested companies in Ghana if it is unable to make its presence in Ghana.

Required:
Evaluate the above policy interventions and advise on the tax implication of each to enable the management of Smith Plc to make a decision.

i) Incorporation:

  • A company incorporated in Ghana is required to pay a stamp duty of 0.5% on the value of shares introduced as stated capital and corporate taxes on profits. Additionally, dividends declared will be subject to an 8% withholding tax. PAYE deductions will be required for employees, with withholding taxes of 3%, 7.5%, or 5% applicable for various services, depending on whether the supplier is resident or non-resident (20% for non-residents).
    Permanent Establishment (Branch):
  • A branch will pay corporate taxes on profits and an additional 8% branch profit tax. It will also follow PAYE and withholding tax rules as in the incorporation case, except that a branch is not liable to stamp duty.
  • Conclusion: The tax implications for both options are similar except for the branch profit tax, which applies regardless of whether profits are repatriated, unlike dividends.

ii) Non-current assets acquired through finance lease:

  • Capital allowance is granted on the capital portion of the lease rentals, while the interest portion is deductible if it meets tax deductibility criteria. For outright purchases, capital allowances apply on the acquisition amount.

iii) Payment of expatriates’ salaries:

  • Income from Ghana is taxed based on the residence status of the employee. Paying part of the salary in Ghana and part abroad has no tax advantage since Ghana taxes the global income of residents.

iv) Acquisition of shares vs. granting loans:

  • Dividends from shares acquired in Ghana are subject to an 8% withholding tax. Interest from loans granted will be subject to withholding tax of 8% for non-residents.
  • 7 Marks

TX – May 2019 – L3 – Q3B – Tax planning

Discuss the tax implications of finance lease arrangements, particularly concerning the eligibility for capital allowance under the Income Tax Act 2015 (Act 896).

b) At a tax seminar organised by The Institute of Chartered Accountants (Ghana) in December 2016, the issue of tax implications for finance lease arrangement dominated the discussion. The facilitator said that both the lessor and the lessee shall be denied capital allowance under the tax law.

The facilitator intimated that capital allowance is granted to persons who acquire assets and own them and use such to generate business income. Both the lessor and the lessee, consequently do not qualify for capital allowance under the Income Tax Act (Act 896), 2015 and its regulations, he added.

Required:
As a tax advisor, submit a response to the above based on the tax provisions. The response is to be published in the Institute’s Journal. (7 marks)

  • Finance lease arrangement is an arrangement where a lessor leases or transfers an asset to the lessee in return for a lease rental payment by the lessee. The risk and reward associated with the leased asset is transferred to the lessee. The lease term exceeds 75% of the useful life of the asset.
  • Capital allowance is an incentive that is given to a person who acquires a depreciable asset and uses the depreciable asset in generating income for the business. The property under finance lease for accounting purposes is the property of the lessor, but for the effect of substance over form, the asset belongs to the lessee for which depreciation is enjoyed and shown in the books of the lessee.
  • For capital allowance purposes, the payment of the lease rental payment shall be apportioned between capital repayment and the interest component in accordance with section 31 of the Income Tax Act, 2015 (Act 896) and LI 2244 Regulation 17. The capital repayment shall be subject to capital allowance for the benefit of the lessee, and the interest component shall be an allowable deduction for the lessee for tax purposes. In effect, the treatment of capital allowance and depreciation shall be the same except for the amount that shall be different.
  • In summary, the following shall be the treatment:

    The lessee shall be granted capital allowance on the principal repayment, and the interest shall be an allowable deduction. In the case of a vehicle that is not a commercial vehicle, the amount shall be restricted to an amount of GH¢75,000.
    The lessor shall not be granted capital allowance but may be granted a capital amount to be determined in accordance with guidelines to be issued by the Commissioner-General

    • .

  • 5 Marks

CR – Nov 2016 – L3 – Q5a – Regulatory framework and ethics

Discuss the ethical and professional issues faced by the financial accountant when considering the treatment of a finance lease in financial reporting.

Mordern Technology Ghana Limited plans to upgrade its production process, and the directors believe that technology-led production is the only feasible way to remain competitive in recent times. However, the company operates from a leased property, and the leasing arrangement was established to maximize taxation benefits. Surprisingly, the financial statements have not shown a lease asset or liability to date.

A new financial accountant joined Modern Technology Ghana Limited just after the financial year-end of 31 July 2016 and is currently reviewing the financial statements to prepare for the upcoming audit and to begin making a loan application to finance the new technology.

The financial accountant believes that the lease relating to both the land and buildings should be treated as a finance lease, but the finance director completely disagrees. The finance director does not wish to recognize the lease in the statement of financial position and, as a result, wishes to continue treating it as an operating lease. The finance director believes that the lease does not meet the criteria for a finance lease and was made clear by the finance director that showing the lease as a finance lease could adversely affect the loan application.

Required:
Discuss the ethical and professional issues which face the financial accountant in the above transaction.

The financial accountant at Modern Technology Ghana Limited is faced with an ethical dilemma regarding the treatment of the lease in the financial statements. The ethical and professional issues involved include:

  1. Integrity:
    • The financial accountant is ethically bound to act with honesty and integrity. If the lease meets the criteria for a finance lease under IAS 17, it must be presented as such in the financial statements, regardless of the finance director’s instructions to treat it as an operating lease. Misrepresenting the lease as an operating lease would violate the principle of integrity and mislead stakeholders.
  2. Objectivity:
    • The financial accountant must remain objective and avoid being influenced by the finance director’s preference to omit the finance lease from the statement of financial position. The finance director’s desire to manipulate the financial statements to enhance the company’s chances of securing a loan constitutes unethical pressure, which could result in misleading financial information.
  3. Professional Competence and Due Care:
    • The financial accountant must demonstrate professional competence by applying the correct accounting standards (IAS 17) to classify the lease. If the lease transfers substantially all the risks and rewards to the lessee, it must be classified as a finance lease. Failing to apply due care in this situation would undermine the financial accountant’s responsibilities as a professional.
  4. Transparency and Fair Presentation:
    • The financial statements should provide a true and fair view of the company’s financial position. The accountant has an ethical obligation to ensure that the financial statements are transparent and that the lease is recognized appropriately. Treating the lease incorrectly as an operating lease would obscure liabilities and mislead potential lenders, violating the principle of fair presentation.
  5. Conflict of Interest:
    • The financial accountant may face a conflict of interest, as failing to follow the finance director’s instructions could affect their job security. However, the accountant must prioritize professional ethics and the accuracy of the financial statements over personal concerns.

Conclusion:

The financial accountant must adhere to the ethical principles of integrity, objectivity, and transparency by ensuring that the lease is correctly classified as a finance lease if it meets the required criteria. This decision should be communicated to the finance director, and the potential consequences of unethical financial reporting should be discussed.

  • 5 Marks

CR – Nov 2016 – L3 – Q2a – IFRS 16: Leases

Account for a sale and leaseback transaction in accordance with IAS 17.

Hard-Work Ltd is a public limited company in Ghana and owned a building on which it raised finance to support its operations. On 1 June 2015, Hard-Work Ltd disposed of the building for GH¢5 million to a finance company when the carrying amount of the building was GH¢3.5 million. However, the same building was immediately leased back from the finance company for a period of 20 years, which was considered to be equivalent to the majority of the asset’s useful economic life. The lease rentals for the period amounted to GH¢441,000 payable annually in arrears. The interest rate implicit in the lease is 7%. The present value of the guaranteed minimum lease payments is the same as the sale proceeds.

Required:
Demonstrate how Hard-Work Ltd will account for the above transaction for the year ended 31 May 2016 in accordance with IAS 17 Leases. Show relevant extracts to the statement of profit or loss and the statement of financial position as at 31 May 2016.

This transaction qualifies as a sale and leaseback. Given that the lease term is for the majority of the asset’s useful life and the present value of the minimum lease payments equals the fair value, the lease should be accounted for as a finance lease under IAS 17.

  • 7 Marks

CR – July 2023 – L3 – Q2c – IFRS 16: Leases

Account for a finance lease from the lessor's perspective under IFRS 16, including initial recognition and subsequent measurement of lease receivable.

c) On 1 January 2021 Partey Leasing PLC (Partey), acquired a large-scale custom-made equipment and leased it to Mane Ltd (Mane) for six years. Mane makes annual payments of GH¢10 million, commencing on 31 December 2021. The equipment has a useful life of seven years. Mane is responsible for insuring and maintaining the equipment, and is required to pay additional GH¢1.5 million at the end of each year provided a defined performance target is met. Mane has guaranteed that the value of the equipment at 31 December 2026 will not be less than GH¢1 million, although Partey anticipates that the open market value at that date will be approximately GH¢2.5 million. The costs incurred by Partey and Mane in arranging the lease amounted to GH¢2.1 million and GH¢1.6 million respectively. The rate of interest implicit in the lease is 9.49% per annum. Mane achieved the defined performance target on 31 December 2021 and made the required payment.

Required: In line with IFRS 16: Leases, explain how Partey would account for the above lease in its financial statements for the year ended 31 December 2021.

(7 marks)

Partey would account for the lease agreement as a finance lease based on the following reasons: The lease term of six years occupies more than 75% of the equipment’s useful economic life of seven years; Mane, the lessee, is responsible for insuring and maintaining the equipment; and The underlying asset is custom-made. At the initial recognition date, Partey would recognise a lease receivable for the finance lease. The receivable would be initially measured at either the sum of the equipment’s fair price and lessor’s initial direct costs or the present value of minimum lease payments and unguaranteed residual value, and subsequently adjusted for interest income, lease payments, any required re-measurements and impairment (if any).

The lease payments would exclude the variable payment as the variability depends on management’s own performance. Partey would only account for such payment as income if the predefined condition is met:

  • 6 Marks

AT – Nov 2020 – L3 – Q4b – Business income – Corporate income tax

Evaluate the tax implications of financing a vehicle through a finance lease arrangement versus an outright purchase for a mining company.

A mining company in Ghana intends to buy a vehicle (Pajero) for official use under a finance lease arrangement or an outright purchase. The cost profile of the vehicle is as follows:

i) Outright Purchase: Cost at GH¢80,000.

ii) Finance Lease Arrangement: Cost inclusive of interest is GH¢105,000, to be paid over three years. The interest component is GH¢30,000 to be spread over the three years.

Required:
Determine which of the options you would advise to be adopted.

Tax Implication of Outright Purchase:

  • The cost of the Pajero for an outright purchase is GH¢80,000.
  • However, under Ghana’s tax law, capital allowance for non-commercial vehicles is restricted to GH¢75,000.
  • Therefore, the capital allowance on the Pajero for outright purchase would be based on GH¢75,000, not the full purchase cost of GH¢80,000.
  • The company would claim capital allowance on GH¢75,000 over the period allowed under the tax law.

Tax Implication of Finance Lease:

  • The finance lease arrangement involves a total cost of GH¢105,000, which includes GH¢30,000 of interest spread over three years.
  • The principal repayment of GH¢75,000 (GH¢105,000 – GH¢30,000) would be treated as the capital cost, and the company would be eligible to claim capital allowance on the GH¢75,000, the same as in an outright purchase.
  • In addition, the interest portion of GH¢30,000 would be deductible as an allowable expense over the three years.
  • This would give the company an additional deduction of GH¢10,000 per year for three years (GH¢30,000/3).

Conclusion:

The finance lease option is more beneficial for the company. Under this option:

  1. The company will claim capital allowance on GH¢75,000 (the same as outright purchase).
  2. The company will also benefit from deducting the interest expense of GH¢30,000 over three years, which provides additional tax savings.
  3. The lease payments are spread over time, which can also aid in managing the company’s cash flow.

Therefore, I would recommend the finance lease arrangement.

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope