company van purchased on finance - The Book-keepers Forum (UK)

lor · Guru

company van purchased on finance

Shamus · Forum Moderator & Expert

Hi Lorraine.

Just logged in and there are sooo many messages to answer today that I don't tink that I've got time to answer them all... Of course, founder members and associates of the grumpy old non gender specific bookkeepers and accountants club go straight to the top of the list.

in this situation its a case of substance over form per FRS15 Tangible Fixed Assets, FRS5 Reporting the Substance of Transactions and SSAP21 Leases and HP Contracts. The client suffers the risks and rewards of ownership therefore even though it is officially owned by the HP/Lease company its ownership actually lies with the client.

To show in the books the finance payments should be split between the capital and interest elements of the lease.

Hire purchase interest is treated as an expense of the period.

Vans are machinery so unlike cars qualify for AIA (thats the entire amount, not just the capital expenditure for this year).

If it's a new start business don't forget that the 50k is pro rata.

For private use and AIA take a look at this link :

http://www.accountingweb.co.uk/item/198604

Hope that this helps,

Cheers,

Shaun.

lor · Guru

thank you, shamus, he will own the van once he has paid it all off. Therefore it is a monthly payment (cr bank and dr loan a/c)? I believe, which will reduce the liability and increase the asset as time goes by. He set up in Sept 2009, therefore he should be able to claim the full value of the van against the AIA.

If this is incorrect please correct me, but this is how I am understsnding it and reallyy appreciate your fast reply, how do you do it????!!!!!!!

What would you do re: interest, would this be shown as a % in the small print when the van was purchased????

-- Edited by lor on Thursday 18th of February 2010 12:50:02 PM

lor · Guru

also just going to read that link you have helpfully put!

Shamus · Forum Moderator & Expert

Afternoon Lorraine,

I didn't think that I was doing too well yesterday as yours was the first answered and that wasn't until well into the afternoon!

Don't know what figures are involved in your clients case but remember with AIA it's to the day, not the month so if the business started on the 1st of September the AIA available to your client is £29,315.07 but if they didn't start until the 30th of September then only £25,342.47 is available.

For anyone else reading this the calculation is :

days in business / days in year * 50k

i.e. 185 / 365 * 50000 = 25342.47

talk soon,

Shaun.

-- Edited by Shamus on Thursday 18th of February 2010 01:05:21 PM

lor · Guru

okay, thank you, I will bear that in mind.

What is the best way to work out interest, would you normally do this from the % in the small print, or maybe look at the statements?????

Shamus · Forum Moderator & Expert

Hi Lorraine,

depends on the hp agreement.

Where the monthly interest is not specified (most cases) assume that interest is front loaded.

Generally accepted practice is to use the sum of digits method.

Let me know if you've not used sum of digits before and I'll run through an example.

cheers,

Shaun.

RobH · Expert

I tend to spread the interest evenly over the hire period if the repayments are the same each month. Just check the agreement, it should state the amount financed and the cost of finance, then divide by number of months for monthly repayments. Credit bank the full monthly charge and debit HP creditor with capital amount and debit HP interest with interest amount. Be a little bit careful on the first repayment as there is usually a one off finance charge. I am assuming you have originally posted the van as dr assets (p&M), cr HP creditor.

Wella · Expert

Morning all

With out quoting from the page I have popped in a link to a page on the HMRC website that has some useful formulas for calculating interest. It also includes some excel worksheet functions.

Hope you find it helpful

http://www.hmrc.gov.uk/manuals/ctmanual/CTM53220.htm

In the case where only the amount borrowed is known, the repayment cycle and amount, I multiply the total monthly cycle (eg 36) by the monthly repayment amount. Then I deduct the amount borrowed and any arrangement fees. I then divide the result by the number of repayment months to give me the monthly interest (on a straight line basis)

Bill

-- Edited by Wella on Friday 19th of February 2010 11:55:18 AM

Shamus · Forum Moderator & Expert

Hi Rob,

that method actually contravenes FRS18 Accounting Principles and FRS15 Tangible Fixed Assets and SSAP21 Leases and HP Contracts.

Think that I'd better tell everyone about sum of digits anyway. Whilst not perfect it is accepted by HMRC as a legitimate method of calculating the interest element of leases and HP Contracts.

Ok, lets assume that we borrow £10000 payable over two years.

The interest to be added (shown in the agreement at outset) is £2400.

That works out to £516.66 pcm for 23 months with a final payment of £516.82.

Of that, if one thought of the interest on a straight line basis they would just take £100 per month in interest Thats wrong as it does not reflect the underlying nature and timing of the interest!

The generally accepted way to allocate interest to the periods to which it relates is the sum of digits method.

Give each month of the agreement a number representing the number of months remaining from 24 down to 1.

Sum all of the numbers (in this case it will total 300).

Divide the total interest amount by the number that you calculated above. So in our example we have 2400 divided by 300 which is 8.

For each month multiply the number given to that month by the calculated interest per unit.
So, for our first month we will have 24 * 8 = £192 interest for the first month.

Subtract the interest from the payment and you have both your interest and capital elements.
Heres the full example in spreadsheet form which I think is more self explanatory :

Capital	10000
Interest	2400	pcm	Total	Final
Total	12400	516.66	12399.84	516.82

Month	Units	Interest	Payment	Capital Element
Jan-09	24	192	516.66	324.66
Feb-09	23	184	516.66	332.66
Mar-09	22	176	516.66	340.66
Apr-09	21	168	516.66	348.66
May-09	20	160	516.66	356.66
Jun-09	19	152	516.66	364.66
Jul-09	18	144	516.66	372.66
Aug-09	17	136	516.66	380.66
Sep-09	16	128	516.66	388.66
Oct-09	15	120	516.66	396.66
Nov-09	14	112	516.66	404.66
Dec-09	13	104	516.66	412.66
Jan-10	12	96	516.66	420.66
Feb-10	11	88	516.66	428.66
Mar-10	10	80	516.66	436.66
Apr-10	9	72	516.66	444.66
May-10	8	64	516.66	452.66
Jun-10	7	56	516.66	460.66
Jul-10	6	48	516.66	468.66
Aug-10	5	40	516.66	476.66
Sep-10	4	32	516.66	484.66
Oct-10	3	24	516.66	492.66
Nov-10	2	16	516.66	500.66
Dec-10	1	8	516.82	508.82
	300	2400	12400	10000
Per Unit	8

Hope that this doesn't lose it's formatting.

cheers,

Shaun.

-- Edited by Shamus on Friday 19th of February 2010 11:56:30 AM

lor · Guru

Shamus wrote:

Hi Lorraine,

depends on the hp agreement.

Where the monthly interest is not specified (most cases) assume that interest is front loaded.

Generally accepted practice is to use the sum of digits method.

Let me know if you've not used sum of digits before and I'll run through an example.

cheers,

Shaun.

Haven't heard of the sum of digits method, at less I don't think I have!

Shamus · Forum Moderator & Expert

Morning Bill,

goodness only knows where all those HTML tags came from? Anyway, just edited them all out.

As you can tell took a while to write the above so missed your insert which does help a lot.

Your link seems to suggest that the revenue accept straight line as a legitimate method. However, per the companies act financial reporting standards take precedence over statute where such are more detailed so, even though the revenue may accept the method to use straight line will not give a true and fair view of the entities affairs as at the period end. Although, the HP / Lease agreement would need to be material to the entity in order to make the entities financial statements unrepresentative of the entities affairs.

In the absence of any other criteria (such as a statement in the HP /Lease agreement that the interest is calculated on a straight line basis) that would make reducing balance via the sum of digits methods the preferable option.

Right, just throw that one into the ball bit to see what happens!

talk in a bit,

Shaun.

Wella · Expert

Morning Shaun (Oops its afternoon now)

Unless I have mis-understood, the HMRC seem to conflict with FRS18&15. If you take a look at the last paragraph on the link I posted, they say that a straight line method is acceptable (subject to auditor approval).

I have to say that my example was based on a sole traders loan and not a corporate entity.

Bill

lor · Guru

Just read what you have put shamus, I think it makes sense to use that one. Thank you all for your replies though!

Wella · Expert

Done it again Shaun

You posted while I was searching the keyboard for the right letters.

You answered my first question. as for my second bit how do financial reporting standards apply to non corporate entities?

I do try to apply FRS but would certainly like to know more - any publications you can suggest (already have a link to FRC website in my favourites)

Bill

lor · Guru

Right just read the posts above me, wasn't there just now, I'm am undecided what to do now! lol

But am now swaying towards the easiest method straight line, oh why are there so many options! lol.....

Shamus · Forum Moderator & Expert

Hi Bill,

the auditor approval relates to ISA320 on materiality. The generally accepted limits are on determining whether a figure is material to the accounts is if the amount is more than the upper value of the following list. If it's less than the lower value then it's immaterial. anything between the two value's is a gray area needing further investigation.

The bands are :

Pre tax profit : 5 - 10%

Turnover : 0.5 - 1%

Total Assets : 1 - 2%

The general statement in relation to materiality is "An item is material where it's omission or misstatement might reasonably be expected to influence the decisions of the addressee's of the financial statements" (yes, really did just do that one from memory!).

So, if the hp agreement is material per ANY (!) of the above limits then to use the straight line method would produce accounts that are misstated.

If the HP amount is less than the lower figure on ALL(!) of the above then as HMRC state there is no material misstatement within the financial statements so there would be no reason that one should not use the straight line method even though such does not give a true and fair view of the entities affairs for the period.

Phew, heavier than our normal conversations on here! Thanks Lorraine, enjoying this one.

Shaun.

RobH · Expert

So it seems that the interest part is unlikely to be material in many cases. I am able to sleep using the straight line method happy in the knowledge that our friends at hmrc will always accept it as it works in their favour, i.e. I am potentially underclaiming the interest in the earlier years. I think a pragmatic approach needs to be adopted at times!

Shamus · Forum Moderator & Expert

Hi Bill,

welcome to the dark side young padawan!

Unfortunately my skills are all with UK GAAP and things are moving at a rapid speed towards IFRS so the books that I use probably wouldn't be a great investment as post 2012 they're basically defunct. (Darn you Sir David Tweedie. What's so wrong with the UK having our own standards!).

Best place for general overview combined with detailed review of standards are BPP and KAPLAN texts for the ACCA. Specifically for the following papers :

F3 Financial Accounting
F7 Financial Reporting
P2 Corporate Reporting

Also
F4 Corporate & Business Law

Other papers incorporate financial reporting standards to varying extents but for our purposes the above are the main ones. (And unless your really masochistic it's probably a good idea to keep away from P2!).

If your interested in Tax, there are two Kaplan ACCA texts that I buy every year,

F6 Taxation
P6 Advanced Taxation.

If you go for these though be warned. P6 is the size of three yellow pages stuck together!!! But of course you certainly get your monies worth with that one.

I'm going off line in a minute as I need to take my boy tobogganing. If I don't reply to your next message straight away I will later.

talk in a bit,

Shaun.

Shamus · Forum Moderator & Expert

Hi Rob,

Mmm, pragmatic, revenue... Sorry, does not compute! lol

think it all depend on the inspector that you get and whether there's anything more obvious that they can get you for!

Sure that you'll be fine but it basically all comes down to how material to the entity it's loans are.

I tend to go for sum of digits regardless.

Shaun.

RobH · Expert

Hi Shaun,

point taken regarding the pragmatic people from hmrc, I would suggest appealing to their beter nature, but perhaps not!

Wella · Expert

Shaun

I was thinking more No5 from Short Circuit, as I need input.

Shows my ignorance of Star Wars - had to look up Padawan.

Bill

Shamus · Forum Moderator & Expert

Hi Bill,

Glad to see that number five is still alive.

I've got a ten year old boy so knowledge of star wars is pretty compulsory... I think he's under the impression at the moment that Jedi is a potential career path!

Anyway, about the books.

Whilst we were out racing down hills in the snow it occurred to me that you might be attracted to the book "Students guide to Accounting and Financial Reporting Standards" by Geoff Black.

Its an excellent book but even though it's still being sold as THE students guide it is actually dangerously outdated so even though there are some chapters that are still relevant (such as those related to Government grants and tangible fixed assets). If you don't know what's changed and whats still relevant it's next to useless.

As you state in your earlier message the websites holding the current standards are definitely your best bet. Although at times it can be difficult to know which standards to look in for what your looking for so helps if you also have some other form of guidance.

I suppose that if you can find a cheap enough copy of any post 2006 version of the CIMA, Wiley or Ernst & Young UK GAAP books that would definitely put you at an advantage. The ISBN for the 2006 CIMA version (the cheapest) is 0750668733... If you really can't get to sleep at night accept no substitute! (especially any chapter talking about financial instruments such as derivatives).

On my bedside table I've got that one and the Auditing Practices Board standards and Guidance. I try to read one chapter per night from either one of them (not both) in painting the seven bridge mode... Namely, when you've got to the end you start again.

I know that I've got to move onto the IFRS GAAP but I'm worried that I've actually run out of available memory! Sure that I'm really not designed to remember all this stuff

Hope that your having a good day. Talk later,

Shaun.

Wella · Expert

Thanks for that Shaun

Been trying to get my head round the various standards that seem to be out there. From UKGAAP to FRS then there's IFRS for SME etc etc. Which has precedence? Whats the difference between the Financial Reporting Council and the International Accounting Standards Board?..................and so on

Then, as you say, there are big changes on the way (Via Brussels I think?)

I know exactly what you mean about running out of memory, it gives me an headache

trying to find the answers, then trying to retain some of it

Bill

lor · Guru

Shamus wrote:

Phew, heavier than our normal conversations on here! Thanks Lorraine, enjoying this one.

Shaun.

Didn't think it would have this effect, alot of food for thought!