Capital lease agreements that are depreciated as leased assets

2016/08/27

ジャカルタの夜景

An operating lease is essentially the same as renting an asset from a leasing company, while a capital lease (from the leasing company’s perspective, a finance lease) or sale-and-leaseback involves your own lease asset, incurring depreciation expenses, and is transferred to the main asset after the lease term ends.

Leases Managed by a Fixed Asset Management System

Here are some familiar examples of receiving services with someone else’s money:

  • A car rental company in Bali lending an Avanza with a driver to numerous tourists
  • Paying for a book on Amazon with a VISA card, resulting in a deferred payment via VISA credit
  • A Japanese company in Jakarta signing a lease agreement with a leasing company to acquire a new Innova, paying lease fees over a 3-year contract
  • Using BCA’s KPR (Kredit Pemilikan Rumah) loan to finance a home purchase, repayable over 15 years

The Avanza rented as a rental car is an asset of the rental company, the book bought on credit is the consumer’s asset, the new Innova under a lease contract is the Japanese company’s asset (though the BPKB = Vehicle Ownership Document is held by the leasing company), and a home purchased with KPR is the consumer’s asset.
A fixed asset management system has the following three functions:

  1. Fixed Asset Management
  2. Construction in Progress Management
  3. Lease Management

When leasing a new Innova as a company vehicle, it’s an operating lease if treated as an expense, but a capital lease (called a finance lease from the leasing company’s perspective) if it’s repayment of a fixed lease asset. The lease management function of the fixed asset system manages capital leases.

Reducing Maintenance Burdens by Transferring Assets via Leaseback

Leaseback involves selling a business asset and continuing to use it while paying usage fees to the buyer. The primary goal is cash inflow from the sale, but transferring ownership also shifts the asset’s maintenance obligations.
For example, the state-owned telecom company Indosat builds telecom towers across Indonesia’s islands. By constructing towers, selling them to a maintenance specialist company, and leasing them back, Indosat outsources maintenance efforts, allowing focus on its core business.

Tax Savings and Cash Outflow Suppression with Capital Leases

In an operating lease, leasing an asset from a leasing company by paying lease fees expenses the asset, suppressing large cash outflows, but it’s essentially the same as renting a car.
In contrast, a capital lease (sale-and-leaseback) involves transferring your own asset to a lease asset without selling it. Unlike short-term payables (A/P), lease obligations are reduced over a long period. This avoids generating output VAT (PPN-out) from a sale to the leasing company while suppressing significant expenditures from machinery purchases.
Since the factory records it as a lease asset, depreciation occurs. At the end of the lease term, it’s transferred to the company’s fixed assets, but since it’s not a purchase (or sale from the leasing company’s perspective), no input VAT (PPN-in) is incurred.
For example, consider a machine with a 10-year depreciation period costing Rp.1,000,000 leased over 3 years. The 11% PPN-in of Rp.110,000 at purchase is not included in the lease amount.
(At Lease Contract Signing)

  • Machine Purchase
    PPN-in 11% is not included in the lease contract amount.
    (Debit) Plant & Machinery 1,000,000    (Credit) Lease A/P 1,000,000
    (Debit) PPN-in 110,000           (Credit) A/P 110,000
  • Lease Contract Amount
    Since it’s not a sale, no 11% PPN-out is incurred.
    (Debit) Lease Asset 1,000,000    (Credit) Plant & Machinery 1,000,000

(Monthly Payments)
The lease contract amount for the machine is Rp.1,000,000, but the purchase amount can be lower than actual, with the difference treated as interest paid with the lease fees.

  • Lease Payment (1,000,000 ÷ 3 ÷ 12)
    (Debit) Lease A/P 27,777        (Credit) Bank 27,777
  • Depreciation Expense (1,000,000 ÷ 10 ÷ 12)
    (Debit) Depreciation 8,333        (Credit) Accumulated Depreciation 8,333

(After Lease Contract Ends)

  • Conversion of Lease Asset to Fixed Asset
    Since it’s not a purchase, no 11% PPN-in is incurred.
    (Debit) Plant & Machinery 1,000,000        (Credit) Lease Asset 1,000,000

(Monthly Payments)

  • Depreciation Expense
    (Debit) Depreciation 8,333        (Credit) Accumulated Depreciation 8,333