An Assessment Of Accounting System In The Leasing Industry (A Case Study Of John Holt Plc Lagos)

Project and Seminar Material for Accountancy / Accounting

An Assessment Of Accounting System In The Leasing Industry (A Case Study Of John Holt Plc Lagos)

Chapter One


1.1 Background Of The Study

Leasing is an alternative source of finance in Nigeria, the importance of leasing in capital investment in the world over cannot be over emphasized, but is yet to take a firm root in Nigeria, this is because, this is because the syndrome of owning everything is still in vogue in the country, the credit evasive is still very high in Nigeria, this singular reason account t for the low patronage of leasing as an alternative source of finance in the country, leasing has many definitions, but the legal definition as given by the statement of accountancy no ii. Says “leasing is a contractual agreement between owner (lessor) and another party the (lessee)” which conveys to the lessor, the right to use the leased asset for a consideration, usually a periodic charge called rentals.

As it can be seen from the above, the concept of leasing envisaged the separation of ownership from the economic use of an asset , this is a fundamental characteristics of leasing, all other features flows from the basic level, this form of credit level is totally different from other forms of finance because it only involve an exchange of asset for a periodic rental, since this form of credit is evolving, there is the need therefore for a standard evaluation and accounting system on the subject, this appreciation of leasing came to limelight in Nigeria in the early 80s, this was made possible because of the austerity measure introduced by the democratic administration of Sheu Shagari and the subsequent introduction of structural adjustment (SAP) in Nigeria being a Mono-cultured economy that depended wholly on crude oil for her revenue and the continuous fall of crude oil price in the international market, because of this, it then became imperative for business to source their capital investment and needs elsewhere.
The uncertainty which paraded the economy made it difficult for financial institutions to go into medium and long term credit financing. Hence, the appreciation of leasing by both lessor and the lessee, there are however two main categories of leasing:

  1. Operating leasing:- this is where the lessor while giving the lessees the use of basic properties retains practically all the risk, obligations and reward of ownership.
  2. Finance capital lease: – this is where the lessor transfers the risk of ownership and reward to the lessee who is obligated to pay such cost as insurance maintenance, and similar charges on the property.
Features Of Finance Lease (SASII)
  1. The lease is not concealable.
  2. The lessee assumes most of the risk and reward of ownership.
  3. The lease term covers substantially (80% or more) of the useful life of the asset.
  4. The lessee is responsible for repairs, maintenance and insurance of the assets.
  5. The lessor has the right of repossession when certain speculated contract conditions are breached.

1.2 Statement Of The Problem

As it can be seen from the background of the study Hence, on accounting for lease, there are numerous problems of which some are:

a. Cost of Capital:

The cost of capital is difficult to determine because it depend on the capital structure of the lessor, if the cost of capital is high, then the rental may be prohibitive and vice – versa.

b. Taxation:

The position of the lesser will impact significantly on the rental and the frequent charge may be an advantage to the lesser.

c. Accounting Treatment:

At times, the lease are not treated according to the classification i.e. operating lease being treated as a financial lease.

1.3 Research Question

The primary purpose of this work entitled accounting system in the leasing industry, therefore, is to evaluate the adequacy of the treatment adopted by various leasing industries in the treatment of their accounting entries and in formation and how they merge accounting theory with practice as profit making organization.

The examination will indicate whether there is a slight variance in the accounting system adopted in reporting various leases.

1.4 Significance Of The Study

The significance of this research project is to enable one to appreciate the proper treatment of the various lease transaction in the financial record of leasing companies, the maintenance of proper accounting of financial records tends to improve the leasing service generally.

In all business endeavors, cost and time are of paramount importance, and has to be controlled at all time, the accounting system adopted will go a long way in controlling these items.

Finally, this work will ensure that the information provided by leasing companies in their financial statement can be evaluated and compared with other companies in the industry.

1.5 Scope Of The Study

We do not intend to cover all the accounting system in leasing transactions business, our work is confined to accounting system in the leasing industry only, the scope of this work do not cover the following areas.

  1. Leasing agreement pertaining to exploitation or exploration of mineral resources such as Oil, gas, minerals and timber.
  2. Leases in favor of contractor financing the development of landed properties.
  3. Lease agreement relating to licensing of intellectual properties such as motion, pictures, video recordings, manuscripts, patients and copyrights.

1.6 Limitations

As we all now that no human effort to achieve a set of goals goes without difficulties, certain constraints were encountered in the course of carrying out this project and they are as follows:-

  1. Difficulty in collection of data: – this is due to the skeptic nature of human beings most especially those in competitive business towards the release of needed information; this may be caused by the constant fear of not willing to release trade secrets.
  2. Difficulty in identifying the contribution of leasing income in the financial statement of most companies engaged in leasing as an opportunity to take advantage of tax incentives.
  3. Prudential guide lines: – another limitation is that imposed by the central bank of Nigeria monetary and fiscal policy from year to year, popularly known as prudential guidelines.

1.7 Research Questions

The research study is designed to answer the following questions, after the completion of the study, the questions are:

  1. Does an assessment of accounting provide a framework for decision making in the leasing industry.
  2. Does assessment of accounting system has impact in the industry.
  3. Does an assessment of accounting leads to attainment of organizational goals in the industry.
  4. Does it impact on the overall objective of the industry
  5. Does it have impact on the profitability ratio of the industry?

1.8 Plan Of The Study

This section will contain the brief content of each chapter,

  • Chapter one will have the background of the study, statement of the research problem, purpose of the study, significance of the study, scope and limitations of the study research question, plan of the study, and the definition of various s terms.
  • Chapter two will treat the literature review of leasing business, meaning of leasing, genesis of leasing, and an evaluation of income recognition.
  • While chapter three will discuss the research method, research approach to the work, sources of information, reliability of data, sample , scope , time and finance.
  • Moreso, chapter four will discuss the analysis of data, presentation of data, profile of the respondents, work duration, other findings, research findings and testing of hypothesis,
  • Finally, chapter five will discuss summary, recommendations, conclusion and bibliography.

1.9 Definition Of Terms

1. Lease:

It is a contractual agreement between the owners (lessor) which conveys to the lessee to use the asset leased for an agreed period of time in return for a consideration usually periodic payment called rents.

2. Operating Lease:

This is one in which the lessor while giving the lessee the use of the leased asset or property returns practically all the risk of obligation and reward of ownership.

3. Finance or Capital Lease:

This is one in which ownership risk and reward are transferred to the lessee who is obliged to pay such loss as insurance, maintenance and similar charges on the asset, usually, the agreement is not concealable.

A. Leverage Lease:

This is a three party lease involving a lender and often a financial institution in addition to the usual lessor and lessee, the lender supplies in most cases the greater part of the purchased price of the leased asset.

B. Sales Type Lease:

This is one where the dealer, (lessor) transfers substantially all the risks of ownership and benefit of the property to the lessee and at the inception of the lessee, the fair value of the leased property is greater or less than the carrying amount in the book of the lessor , resulting in a profit or loss to the lessee who is often a manufacturer or a dealer.

C. Direct Finance Lease:

This is slightly different from the sales – type , the fair value of the leased asset is the same as its carrying amount to the lessor.

4. Sales and Lease Back:

It is the one in which the seller of the property leases it back from the buyer.

5. Bargain Purchase Option:

It is a provision in the leased agreement, granting the lessee the option to purchase the leased property for a minimal sum considered lower than the lucky prevailing fair value of the property at the time the option is exercisable.

6. Fair Value:

It is the amount that can be realized upon the sale of the property in a free market and in an arms length transaction between knowledgeable parties.

7. Inception of Lease:

It is the date that both parties agreed and make definite commitment to the principal lease agreement.

8. Initial Direct Lease Cost:

The lessor who is directly attributable to the particular lease agreement incures the cost, the cost includes legal fees, documentation cost, stamp duty and commission.

9. Residual Value of Lease:

It is the estimated fair value of the leased asset at the end of the lease term.

10. Useful Life of an Asset:

The short of (A) at the pre- determined physical life and (B) the economic life during which it could be profitably employed in the operation of the enterprise.

11. Unguaranteed Residual Value:

It is the portion of the residual value of the leased asset that is not guaranteed by the lessee or guaranteed only by the third party related to the lessor.

12. Lease Term

It is the duration of the lease which may vary from few months to the entire life of the asset.

13. Contingent Rentals:

these are increase or decrease in lease payment made by lessee as a result of changes occurring after the inception of the lease.

Chapter Five

Summary, Recommendations and Conclusion

5.1 Summary

The research work covers a wide range which include among other things, the introduction of the topic , accounting system in a leasing industry, the objective, limitation, scope and definition of basic terms,

Furthermore, the historical background of leasing and its development the world over, and problems facing industries offering leasing services were equally touched in chapter two.

Chapter five discussed recommendations and conclusion which may be useful for further research works on the topic. The procedure for data collections was through the questionnaires and personal interviews, a total of 10 questionnaires were administered, the data collected were treated using chi-square method, result from the study proved that proper maintenance accounting or financial records tends to improve the leasing service, generally, the accounting system adopted by the company will go a long way in controlling the extent of leasing accounting and vice-versa. Other parameters combined in producing the accounts.

5.2 Conclusion

The main objective of this project is to explore in depth, the significance of accounting system in leasing industry, this is also to contribute to the outstanding achievements in most companies in the leasing business.

It also set out to study the problems that are likely to affect such systems and the possible solution to such problems.

In conclusion, though reference is made to a company, however, the general reference drawn from this work when effectively used will be an achievement in the leasing industries in Nigeria.

To end this write-up, we can conclude that the outcome of this project comprises of series of practically useful suggestions which if adopted can lead to sound achievement of their objectives; this is of valuable importance to all leasing firms in Nigeria and the economy in general.

5.3 Recommendations

Despite the fact that this study is centered on the accounting system in the leasing industries, it will assist in harnessing the use of accounting system in evaluating and reporting of leasing activities.

Since leasing helped other economies to grow through the provision of advances in form of asset acquisition, there should be fiscal incentives to encourage companies and banks involved in leasing giving the backward nature of agriculture, which as once the major source of foreign earnings, the companies and banks involved in leasing should be given government backing and encouragement, in order to do this, companies can only be assessed base don the accounting records presented to their financial statement.

The policy of encouraging leasing business will no doubt increase the nation’s economic recovery and less dependence on oil as the major source of revenue, this is because the country will be able to increase her agricultural export and finished goods.

An Assessment Of Accounting System In The Leasing Industry (A Case Study Of John Holt Plc Lagos)

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