Account 303- Fixed assets acquired under finance leases

1. Accounting principles:

a) This account shall be used for recording the existing value of, any increase or decrease in, all fixed assets acquired under finance leases of a microfinance institution according to their historical costs;

b) Recording entries in this account must adhere to the Vietnamese Accounting Standard No. 06 – Asset lease:

– Finance lease refers to a form of asset lease under which the lessor transfers a large part of risks and interests associated with ownership of the leased asset to the lessee. Ownership of such leased asset may be transferred at end of the lease term.

– Below are cases usually leading to finance leases, including:

+ The lessor transfers ownership of the leased asset to the lessee after expiration of the lease term;

+ At the time of initiation of a finance lease, the lessee may choose to purchase the leased asset at the price lower than the reasonable price at the end of lease term;

+ The term of lease of a fixed asset must account for a large part of the economic useful life of such asset, irrespective of whether ownership of such asset is transferred;

+ At the time when an asset lease begins, the present value of rental payment must at least account for a large (equivalent) part of reasonable value of the released asset;

+ The leased asset is the specially-designed one that only the lessee can use without needing to make any major change or repair.

– An asset lease shall be considered as a financial lease contract if it meets at least one of three (3) requirements mentioned hereunder:

+ The lessee cancels the contract and compensates the lessor for any loss arising from cancellation;

+ Incomes or losses arise from any change in the reasonable residual value of the leased asset associated with the lessee;

+ The lessee is capable of renewing the asset lease under which the rent charge is lower than the fair market rental value. In particular, the lease under which the leased asset is the land use right shall be deemed as the operating lease;

c) Although a fixed asset rented under a finance lease is an asset not yet owned by a microfinance institution, the microfinance institution shall have obligations and responsibilities to manage and treat it like its own asset;

d) Value of a fixed asset under finance lease must be entered in the account 303 “Fixed assets acquired under finance lease” according to its historical cost. Accountant must keep detailed record of historical costs of fixed assets according types and characteristics of specific fixed assets. Historical costs] of a fixed asset under finance lease can be determined as follows:

– Historical cost of a fixed asset acquired under a finance lease is recorded as the reasonable value of the leased asset, or is defined as the present value of the minimum payment of the rent charge (if the reasonable value is greater than the present value of the minimum payment of the rent charge) plus the initial cost directly associated with the finance lease transaction. If the input VAT is deducted, the present value of the minimum payment of the rent charge shall not include the VAT amount payable to the lessor.

When calculating the present value of such minimum payment for the rental of an asset, a microfinance institution may use the implicit interest rate, the interest rate specified in the lease or the marginal interest rate.

– The non-deductible amount of input VAT on a fixed asset under a finance lease shall be regulated as follows:

+ If the input VAT amount is paid on a one-off basis at the time of recognition of the leased asset, the historical cost of the leased asset shall include the VAT tax;

+ If the input VAT is paid with installments, it shall be charged as during-period production and business expenses corresponding to respective entries of depreciated costs of the leased asset.

– The debt incurred from a finance lease that is posted as a liability entry shall not include the input VAT.

– Value of fixed assets under operating leases shall not be posted on this account;

c) Calculation and depreciation of fixed assets of this kind shall be subject to laws.

The lessee shall be responsible for regularly calculating and distributing the depreciation value of fixed assets under finance leases into production and business costs according to the depreciation regime conformable to the depreciation regime applied to the asset of the same type under the ownership of the microfinance institution. If it is not certain that the lessee will be granted ownership of a leased asset after the lease term expires, the leased asset will be depreciated according to the lease term that is shorter than its useful life;

g) Each fixed asset under a finance lease with its specifications must be recorded in detail according to data about its classification type, locations for its storage, use and management as specified in the “fixed asset log”.

2. Account 303 can be subdivided into tier-2 accounts, including:

3031- Tangible fixed assets hired under finance leases

3032- Intangible fixed assets hired under finance leases

3. Structure and entries of the account 303:

Debit side: – Increased historical costs of fixed assets hired under finance leases.

Credit side: – Decreased historical costs of fixed assets under finance leases that are returned to lessors on expiry or bought back as fixed assets of the microfinance institution.

Debit balance: – Historical costs of existing fixed assets under finance leases that a microfinance institution hires.

Detailed accounting: Accountants shall be obliged to keep track of specific fixed assets hired under finance leases by using subaccounts.