Account 212 – Financial lease fixed assets

1. Rules for accounting

a) This account is used to record current value and increase and decrease in total financial lease fixed assets of an enterprise. This account is used to record historical costs of financial lease fixed assets of the lessee (such fixed assets are not under ownership of the enterprise, but the enterprise has legal liability to manage and use them similarly to their assets).

b) Financial lease: a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Ownership of the asset may be transferred at the end of the lease term.

c) Recognition of financial lease: a financial lease must satisfy at least one of five criteria below:

- Ownership of the asset is transferred to the lessee at the end of the lease term;

- At the inception of the lease, the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the value at the end of the lease term; - The lease term is for the major part of the economic life of the asset even if title is not transferred;

- At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset;

- The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made.

d) An asset lease shall be considered a financial lease if it meets at least one of three criteria below:

- If the lessee cancels the lease and compensates the losses caused by the cancellation of the lease to the lessor;

- Gains or losses from variation in the fair value of the residual value of the leased asset shall be borne by the lessee;

- The lessee has ability to continue the lease after the termination of the lease at a rent which is lower than the market rent. Leases of assets which are land use rights shall be classified as operating lease.

dd) Historical cost of a financial lease fixed asset shall equal fair value of the lease or present value of minimum lease payments amounts (in case the fair value is greater than present value of minimum lease payments amounts) plus (+) initial direct costs incurred in connection with financial leasing activities.

If the input VAT is deductible, present value of minimum lease payments amounts shall not include VAT payables to the lessor.

When calculating the present value of minimum lease payments amounts, the enterprise may use the implicit interest rate, interest rate stated in the lease or the incremental borrowing interest rate of the lessee.

e) The non-deductible input VAT on the leased asset which is paid by the lessee on behalf of the lessor shall be recorded as follows:

- If the non-deductible input VAT is made a lump sum payment when recording the leased asset, the historical cost of the leased asset shall include VAT;

- If the non-deductible input VAT is paid instalment, it shall be recorded to operating cost during a period in conformity with depreciation costs of financial lease assets.

g) Operating lease fixed assets shall not be recorded to this account.

h) The lessee shall calculate, depreciate the fixed asset and charge to operating costs periodically in conformity with the depreciation policy applied to its owned-fixed assets in kind. If it not sure that the lessee shall acquire the ownership of the asset at the end of the lease term, the leased asset shall be depreciated according to the lease term if the lease term is shorter than the useful life of the leased asset.

i) Account 212 shall be detailed to keep track of every type of leased fixed asset.

2. Structure and contents of account 212 – Financial lease fixed assets

Debit: Increases in historical costs of the financial lease fixed assets.

Credit: Decreases in historical costs of financial lease fixed assets due to returning to the lessor at the end of the lease term or buying and converting into the fixed assets of the enterprise.

Debit balance: Historical cost of existing financial lease fixed assets.

Account 212 – Financial lease fixed assets comprises 2 sub-accounts

- Account 2121 – Financial lease tangible fixed assets: records current value and increases and decreases in total financial lease tangible fixed assets of the enterprise;

- Account 2122 – Financial lease intangible fixed assets: records current value and increases and decreases in total financial lease intangible fixed assets of the enterprise.

3. Method of accounting for several major transactions

3.1. When incurring initial direct cost in connection with the financial lease asset before receiving the leased asset, such as: commission fees, legal fees, etc, the following accounts shall be recorded:

Dr 242 – Prepaid expenses

Cr 111, 112, etc.

3.2. When paying an advance of the financial lease rent or deposit to secure the lease, the following accounts shall be recorded:

Dr 341 – Borrowings and finance lease liabilities (3412) (prepaid lease payments)

Dr 244 – Mortgage, collaterals and deposits

Cr 111, 112, etc.

3.3. When receiving a financial lease fixed asset, the value of the financial lease fixed assets (input VAT-exclusive prices) shall be recorded according to the lease and related documents, the following accounts shall be recorded:

Dr 212 – Financial lease fixed assets (VAT-exclusive prices)

Cr 341 – Borrowings and finance lease liabilities (3412) (present value of minimum lease payments amounts or fair value of the leased asset, excluding refundable taxes).

Initial direct costs in connection with financial lease activities shall be recorded to the historical cost of the financial lease fixed assets as follows:

Dr 212 – Financial lease fixed assets

Cr 242 – Prepaid expenses, or

Cr 111, 112, etc. (Direct costs in connection with financial lease activities incurred when receiving the financial lease asset).

3.4. Periodically, upon the receipt of the financial lease invoices:

When paying the principal and lease interest to the lessor, the following accounts shall be recorded:

Dr 635 – Financial expenses (lease interest of current period)

Dr 341 – Borrowings and finance lease liabilities (3412) (lease principal of current period)

Cr 111, 112, etc.

3.5. When receiving an invoice for input VAT sent by the lessor who is paid by the lessee:

1. a) If the VAT is deductible, the following accounts shall be recorded:

Dr 133 – Deductible VAT (1332)

Cr 112 – Cash in bank (lump sum payment)

Cr 338 - Other payables (input VAT payables to the lessor).

1. b) If the VAT is not deductible, the following accounts shall be recorded:

Dr 212 – Financial lease fixed assets (if the input VAT is not deductible and the VAT is paid lump sum when recording the financial lease fixed assets)

Dr 627, 641, 642 (if the non-deductible input VAT is paid whenever the invoice is received)

Cr 112 – Cash in bank (lump sum payment)

Cr 338 - Other payables (input VAT payables to the lessor).

3.6. When paying the commitment fees to the lessor, the following accounts shall be recorded:

Dr 635 – Financial expenses.

Cr 111, 112, etc.

3.7. When returning the financial lease fixed assets as mentioned in the lease to the lessor, a decrease in the value of the financial lease fixed assets shall be recorded as follows:

Dr 214 – Depreciation of fixed assets (2142)

Cr 212 – Financial lease fixed assets.

3.8. If the lease prescribes that the lessee only rent a part of the value of the asset and buy it then, when the lessee receives the transfer of the ownership of the asset, a decrease in financial lease fixed assets and an increase in tangible fixed assets under ownership of the enterprise shall be recorded. When converting the financial lease asset to the asset under ownership of the enterprise, the following accounts shall be recorded:

Dr 211 – Tangible fixed assets

Cr 212 – Financial lease fixed assets (residual value of the financial lease fixed asset)

Cr 111, 112, etc. (additional payables).

And, when transferring depreciated value, the following accounts shall be recorded:

Dr 2142 – Depreciation of financial lease fixed assets

Cr 2141 – Depreciation of tangible fixed assets

3.9. Accounting for sale and leaseback of financial lease fixed assets:

a) If the sale and leaseback gives the price which is greater than the residual value of the fixed asset:

- Accounting for the sale transaction (refer to account 711)

- Those entries recording leased assets and accounts payables in connection with finance lease shall comply with regulations from Point 3.1 to 3.6 of this Article.

- Periodically, the depreciation of the financial lease fixed asset shall be calculated, deducted and recorded to operating costs as follows:

Dr 623, 627, 641, 642, etc.

Cr 2142 – Depreciation of financial lease fixed assets

- Periodically, when transferring the difference between the price and residual value of the leased back fixed asset (profit) to operating costs of the period over then lease term, the following accounts shall be recorded:

Dr 3387 - Unearned revenue

Cr 623, 627, 641, 642, etc.

b) If the sale and leaseback gives the price which is smaller than the residual value of the fixed asset:

- Accounting for the sale transaction (refer to account 711)

- Those entries recording leased assets and accounts payables in connection with finance lease, periodical rents shall comply with regulations from Point 3.1 to 3.6 of this Article.

- Periodically, when transferring the difference between the price and residual value of the leased back fixed asset (loss) to operating costs of the period over then lease term, the following accounts shall be recorded:

Dr 623, 627, 641, 642, etc.

Dr 242 – Prepaid expenses

Source: Circular 200