Circular No. 03/1997/TT-NH2 on guiding the accounting for financial leasing transactions

CIRCULAR

Guidelines for accounting for financial leasing transactions

Pursuant to Decree No. 64/CP dated October 9, 1995 of the Government, promulgating the Interim Regulation on the organization and operation of financial leasing companies in Vietnam (hereinafter referred to as the Interim Regulation on the organization and operation of financial leasing companies), the State Bank guides the accounting for financial leasing transactions as follows:

II- SUPPORT MEASURES FOR STATE-OWNED AGRICULTURAL FARMS AND FORESTRY COMPANIES IN THE FIELD OF SCIENCE AND TECHNOLOGY

1\. A financial leasing transaction must satisfy one of the criteria stipulated in Article 3 of the Interim Regulation on the organization and operation of financial leasing companies. Other leasing transactions that do not meet the criteria for financial leasing are not within the scope of guidance of this Circular.

2\. Article 1 of the Interim Regulation on the organization and operation of financial leasing companies provides: "Financial leasing is a medium and long-term credit activity through the leasing of machinery, equipment, and other chattels." Therefore, the accounting for financial leasing transactions has characteristics similar to those of credit transactions:

- The value of the leased asset is recorded as a receivable of the financial leasing company.

Although the leased asset belongs to the financial leasing company, the company does not depreciate (or allocate the value of the asset) to its business expenses but instead recovers the value of the asset gradually through rental payments made by the lessee.

- In addition to recovering the value of the leased asset (also called the principal of financial leasing), the company also collects interest on financial leasing. This interest must be calculated and recorded separately from the principal of financial leasing.

3\. A financial leasing contract is one of the bases for:

- Recording the value of the leased asset in accounts 4312 and 4322.

- Recording the process of recovering the principal and collecting interest.

Therefore, the financial leasing contract must be established according to the regulations and the model issued by the State Bank.

4\. The principal of financial leasing includes the purchase price of the asset and other amounts payable by the lessee, excluding from the principal any amounts that the lessee is not required to pay.

II\. ACCOUNTING FOR PURCHASE AND LEASING OF ASSETS

1\. When making advance payment to purchase assets for financial leasing under a contract, record:

Debit Account 4311 - Advance payment for purchasing leasing assets in Vietnamese dong.

Or Account 4321 - Advance payment for purchasing leasing assets in foreign currency.

Credit Suitable Account: Cash, Bank Deposits...

2\. In cases where the leased asset has been purchased but the lessee has not yet received it, and the company temporarily manages it, record:

Enter Account 941 - Assets for financial leasing currently managed by the company.

For existing assets of the financial leasing company used for leasing purposes, if a leasing contract has not yet been signed, they should be recorded in Account 743 - Materials (if no leasing contract has been signed) or Accounts 4311, 4321 (if a leasing contract has been signed) and recorded in the off-balance sheet Account 941 - Assets for financial leasing currently managed by the company.

3\. When starting financial leasing, record:

Debit Account 4312 - Financial leasing receivables in Vietnamese dong within the term and extended terms.

Credit Account 4311 - Advance payment for purchasing leasing assets in Vietnamese dong.

Or

Debit Account 4322 - Financial leasing receivables in foreign currency within the term and extended terms.

Credit Account 4321 - Advance payment for purchasing leasing assets in foreign currency.

Simultaneously, the accountant records:

Enter Account 942 - Assets for financial leasing currently leased to customers.

In cases where the leased asset was previously managed by the company, record:

Exit Account 941 - Assets for financial leasing currently managed by the company.

III\. ACCOUNTING FOR RECOVERY OF PRINCIPAL AND INTEREST IN FINANCIAL LEASING

1\. Rental payments made by the lessee are analyzed into two parts:

- Recovery of principal in financial leasing.

- Interest income from financial leasing.

Determining the rental payment due from the lessee each period, the amount of principal recovered, and the interest income collected each period must be carried out according to the principle:

- Ensuring full recovery of the principal of financial leasing at the end of the lease term.

- Accurately calculating the interest income from financial leasing based on the interest rate and the remaining principal that the lessee has not yet paid.

2\. Periodically, when receiving rental payments from the lessee, based on the principal recovered and the interest amount, the company records:

Debit Account Cash or bank deposits...

Credit Account 4312 - Financial leasing receivables in Vietnamese dong within the term and extended terms (principal).

or Account 4322 - Financial leasing receivables in foreign currency within the term and extended terms (principal).

Credit Account 8018 - Interest income from financial leasing (interest amount).

3\. In cases where the rental payment is determined in foreign currency and the rental payment is made in Vietnamese dong at the exchange rate at the time of payment, handle as follows:

- Adjust the remaining balance on Account 4322 according to the exchange rate at the time of payment (the difference is recorded in Account 631 - Exchange rate differences).

- Record the journal entry similar to point 2 above.

4\. In cases where the lessee fails to make rental payments by the due date, handle as follows:

- Transfer the portion of the principal of financial leasing that the lessee must pay during the period to the appropriate "Overdue financial leasing" account.

- Unrecovered interest is recorded in the off-balance sheet Account 93 (931 or 932) - Unrecovered interest (for financial leasing companies, this means unrecovered interest from financial leasing).

IV\. CONCLUSION OF FINANCIAL LEASING TRANSACTIONS

1\. Accounting for the termination of financial leasing transactions upon expiration of the contract:

a\. Transfer ownership of the asset to the lessee or sell the asset to the lessee at a price lower than the market price, when receiving payment, record:

Debit Suitable Account: Cash or bank deposits...

Credit Account 8019 - Other income from operations (sub-account: income from selling leased assets).

Simultaneously, the accountant records:

Exit Account 942 - Assets for financial leasing currently leased to customers.

b\. Extension of leasing according to agreement: The company records based on additional payments made by the lessee:

Debit Account Cash or bank deposits...

Credit Account 8019 - Other income from operations (sub-account: income from extending financial leasing).

c. Reclaiming financial lease assets: When reclaiming financial lease assets, the company must open a record and account for them off-balance sheet:

Enter Account 941 - Assets for financial leasing currently managed by the company.

Simultaneously, the accountant records:

Exit Account 942 - Assets for financial leasing currently leased to customers.

Subsequently, account for the disposal of financial lease assets appropriately.

2. Accounting for early termination of contracts:

a. In cases where the lessee breaches the contract or the financial lease asset is damaged or lost:

- When recovering financial lease assets due to the lessee's breach of contract, account for it as follows:

Enter Account 941 - Assets for financial leasing currently managed by the company.

Simultaneously, the accountant records:

Exit Account 942 - Assets for financial leasing currently leased to customers.

Subsequently, account for the disposal of financial lease assets appropriately.

- In cases where the financial lease asset is damaged or lost, account for it as follows:

Exit Account 942 - Assets for financial leasing currently leased to customers.

- The remaining principal amount that the lessee must pay according to the contract is transferred to an overdue receivable account. The overdue period is calculated from the date of early termination of the contract. Unreceived interest is accounted for in the off-balance sheet account 93 (931 or 932) - Unreceived Interest.

- Other compensation amounts payable by the lessee upon receipt of payment, account for it as follows:

Debit Account Cash or bank deposits...

Credit Account 809 - Other Income.

b. In cases where the leasing company breaches the contract leading to early termination of the contract, account for the compensation amounts as follows:

Debit Account 8199 - Other Expenses

Credit Cash or Bank Deposit...

V. IMPLEMENTATION PROVISIONS

This Circular takes effect fifteen days from the date of signature. During implementation, if there are any difficulties, please report to the State Bank of Vietnam (Accounting and Finance Department) for timely resolution.

 

ANNEX

To ensure accurate calculation and analysis of lease payments into principal and interest received each period, the State Bank of Vietnam provides guidance on certain methods of calculating and analyzing lease payments as follows:

1. If the lease payment amount the lessee must pay in each payment period is equal, the leasing company bases on the principal amount, interest rate, and number of payment periods to determine the amount the lessee must pay each period as follows:

Where:

- P is the amount the lessee must pay each period.

- A is the principal amount to be recovered throughout the lease term.

- r is the agreed interest rate between the company and the customer in the financial lease contract, consistent with current regulations.

- n is the number of lease payment periods throughout the lease term.

Periodically, when receiving lease payments from customers, analyze the interest and principal received during the period as follows:

Example:

A financial lease transaction has the following data:

Value of the financial lease asset: 80,000,000 VND

- Lease interest rate: 8%/year

- Payment period: every quarter

- Lease term: 3 years

Based on the above data, the company agrees with the customer on the amount to be paid each quarter as follows:

Based on the quarterly payment amount from the customer, analyze the interest and principal as follows: