You are the financial director of Pilgrim plc, a listed company. Your new group managing director, appointed from one of Pilgrim plcâ€™s overseas subsidiaries, is reviewing the principal accounting policies and is having difficulty understanding the accounting treatment and disclosure of assets leased by Pilgrim plc as lessee, of which there are a substantial number (both finance and operating leases).
Prepare a memorandum for your managing director explaining, in simple terms, the basics of accounting for leased assets in the accounts of listed companies (in full compliance with the relevant accounting standards and the Companies Acts). Your memorandum should be set out in sections as follows:
(a) Outline the factors which can influence the decision as to whether a particular lease is a finance lease or an operating lease.
(b) As an example, taking the following non-cancellable lease details:
â€“ fair value (as defined in SSAP 21): Â£100 000
â€“ lease payments: five annual payments in advance of Â£20000 each
â€“ estimated residual value at the end of the lease: Â£26 750 of which Â£15 000 is guaranteed by Pilgrim plc as lessee
â€“ interest rate implicit in the lease: 10%
demonstrate whether the lease falls to be considered as a finance lease or an operating lease under the provisions of SSAP 21, explaining the steps in reaching a conclusion.
(c) Explain briefly any circumstances in which a lessor and a lessee might classify a particular lease differently, i.e. the lessee might classify a lease as an operating lease whilst the lessor classifies the same lease as a finance lease or vice versa.
(d) Explain briefly any circumstances in which the requirements of SSAP 21 with regard to accounting for operating leases by lessees might result in charges to the profit and loss account different from the amounts payable for the period under the terms of a lease.
(e) Draft a concise accounting policy in respect of â€˜Leasingâ€™ (as a lessee only) suitable for inclusion in the published accounts of Pilgrim plc and comment on the key aspects of your policy to aid your managing directorâ€™s understanding.
(f) List the other disclosures Pilgrim plc is required to give in its published accounts in respect of its financial transactions as a lessee.
Note: Ignore taxation.