Accounting Treatment for Operating Leases and Capital Leases

Operating leases are essentially the same as renting assets from a leasing company. Capital leases (finance leases from the leasing company's perspective) and sale & leaseback involve depreciation expenses as they are considered leased assets. At the end of the lease term, these are transferred to the main assets.

Leases Managed by Fixed Asset Management Systems

There are several common examples of using other people's money for services.

For instance, a car rental company in Bali rents out Avanza cars with drivers to various travelers, paying for books purchased on Amazon with a VISA card results in a credit with VISA's deferred payment, a Japanese company in Jakarta enters into a lease agreement with a leasing company to purchase a new Inova and pays the lease fee over a 3-year contract, and using BCA's KPR to receive a loan and pay for a home over 15 years.

The Avanza rented as a rental car is the asset of the rental company, the books bought on credit are the consumer's asset, the new Inova under the lease agreement is the Japanese company's asset (the vehicle registration certificate is kept by the leasing company), and the home purchased using KPR is the consumer's asset.

The fixed asset management system has the following three functions:

If a new Inova is leased as a company car and recorded as an expense, it is an operating lease, but if it is a repayment of a leased asset as a fixed asset, it becomes a capital lease (finance lease from the leasing company's perspective), and the lease management function of the fixed asset system manages capital leases.

Reducing Maintenance Burden by Transferring Assets through Leaseback

Leaseback is a method where business assets are sold, and the seller continues to use the assets while paying usage fees to the purchaser. The main purpose is cash inflow from the sale, but by transferring ownership of the assets, the maintenance obligations can also be transferred. This reduces the maintenance burden, allowing companies to focus on their core business.

Tax Savings and Cash Outflow Reduction through Capital Leases

In operating leases, leasing assets from a leasing company by paying lease fees allows for the expense of assets and reduces large cash outflows, similar to renting a car. On the other hand, in capital leases (sale & leaseback), it is possible to transfer assets to leased assets without selling them, reducing lease liabilities over a long period. This prevents the occurrence of value-added tax (PPN-out) from sales to the leasing company and suppresses large expenditures at the time of machine purchase. Since the leased assets are recorded as assets on the factory side, depreciation occurs, and at the end of the lease contract period, it is transferred to the company's fixed assets, but since it is not a purchase (sale from the leasing company's perspective), value-added tax (PPN-in) does not occur.

Case: For example, suppose a machine with a depreciation period of 10 years worth Rp.1,000,000 is leased for 3 years. The PPN-in 11% of Rp.110,000 incurred at the time of purchase is not included in the lease amount. (At the time of lease contract) 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 No PPN-out 11% occurs as it is not a sale.

(Debit) Lease asset 1,000,000 (Credit) Plant & Machinery 1,000,000 (Monthly payment) The lease contract amount for the machine is Rp.1,000,000, but the purchase amount is actually lower, and the difference can be divided as interest paid at the time of lease fee payment.

Lease fee 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 the lease contract period ends) Fixed assetization of lease assets No PPN-in 11% occurs as it is not a purchase.

Case: The state-owned telecommunications company Indosat constructs radio towers on various islands in Indonesia, but by selling them to a maintenance management specialist company and leasing them back, the maintenance effort can be outsourced, allowing focus on core business.

Takeaway: Selling and leasing back assets can be a means of outsourcing asset management and maintenance, allowing focus on core business.

(Debit) Plant & Machinery 1,000,000 (Credit) Lease asset 1,000,000 (Monthly payment) Depreciation expense (Debit) Depreciation 8,333 (Credit) Accumulated depreciation 8,333

Frequently Asked Questions | Accounting Treatment and Tax Savings of Leases

Based on the content of this article, frequently asked questions are briefly organized.

What is the difference between operating leases and capital leases?

Operating leases are essentially the same as renting assets from a leasing company. Capital leases involve depreciation expenses as leased assets, and at the end of the lease term, they are transferred to the main assets.

How are tax savings achieved through capital leases?

In capital leases, it is possible to reduce lease liabilities over a long period without selling leased assets. This prevents the occurrence of value-added tax (PPN-out) and suppresses large expenditures at the time of machine purchase.

What is the purpose of sale & leaseback?

The main purpose of sale & leaseback is to obtain cash inflow by selling assets. Additionally, by transferring ownership of the assets, the maintenance burden can be reduced, allowing companies to focus on their core business.