If a entity does capital expenditure on the machine whose ownership is not with entity i.e. it is not owned by the entity.
Then can depreciation can be claimed on the ecapital expenditure done by entity.
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Depreciation
Replies (13)
Firstly tell me how a company is charging depreciation on an asset which the company does not own
Secondly how is the company making an expenditure on an asset which it does not own.
If machinery is taken on lease/rent then any capital expenditure made by lessee will not be eligible for depreciation
the first & the foremost requirement to claim dep is to possess the ownership on the respective asset.
if asset take on lease and if that lease is finance lease then depreciation is allowed for lessee
in case of finance lease lesse can claim depreciation even though he is not owner
| Originally posted by : Harish Bhootra | ||
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If a entity does capital expenditure on the machine whose ownership is not with entity i.e. it is not owned by the entity. Then can depreciation can be claimed on the ecapital expenditure done by entity. |
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If There is MOU between both the Co. and the owner about the asset and if the owner is not claiming Dapreciation then co. cna claim Dep.
In the following cases the depreciation can be claimed without ownership:-
1. In case of financial lease where at the end of lease period the property is transferred to the lessee.
2. In case of hire purchase agreement as per substance over form the hire purchaser charges depreciation without ownership as he become owner only after payment of last instalment.
CAN NOT CHARGE DEPRECIATION IF YOU HAVE NOT OWNERSHIP OF ASSET
FIRST BASIC CONDITION FOR CLAIMING DEP.
! OWNER OF ASSET(OTHER THAN LEASE CASE)
| Originally posted by : priyanka bathwal | ||
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| I appreciate u r answer, | |||||||||
| Explanation for point No.1 of your answer. | |||||||||
| A finance lease transfers substantially all the risks and rewards incidental to ownership. | |||||||||
| Title may or may not eventually be transferred to the lessee. | |||||||||
| Criteria for finance lease. | |||||||||
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(i.e) Situations which would normally lead to a lease being classified as a finance lease. | ||||||||
| 1) | The lease transfers ownership of the asset to the lessee by the end of the lease term. | ||||||||
| 2) | The lessee has the option to purchase the asset at a price which is expected to be sufficiently | ||||||||
| lower than the fair value at the date the option becomes exercisable such that, | |||||||||
| at the inception of the lease, it is reasonably certain that option will be exercised. | |||||||||
| (Also known as a bargain purchase option). | |||||||||
| 3 | )The lease term is for the major part of the economic life of the asset even if title is | ||||||||
| not transferred. | |||||||||
| 4 | )At the inception of the lease, the present value of the minimum lease payments amounts to at least | ||||||||
| substantially all of tha fair value of the leased asset. | |||||||||
| 5 | )The leased asset is of a specialised nature such that only the lesses can use it without major | ||||||||
| modifications being made. | |||||||||
| Situations which individually or in combination could also lead to | |||||||||
| a lease being classified as a finance lease. | |||||||||
| 6 | )If the lessee can cancel the lease, the lessor's losses associated with the cancellation | ||||||||
| are borne by the lessee. | |||||||||
| 7 | )Gains or losses from the fluctuation in the fair value of the residual fall to the lessee. | ||||||||
| 8 | )The lessee can continue the lease for a secondary period at a rent | ||||||||
| which is substantially lower than market rent. | |||||||||
| Stress : | |||||||||
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The first five criteria are determinative in nature. | ||||||||
| (i.e) If any one is met the conclusion would be that the lease is a finance lease. | |||||||||
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| For Example : | |||||||||
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Where ownership of the asset is transferred to the lessee at the end of the lease | ||||||||
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term, the lease is a finance lease. | ||||||||
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Even if the ownership continues with the lessor at the end of the lease term, | ||||||||
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the lease would be classified as a finance lease if the lease term was for | ||||||||
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a major part of the economic life of the asset. | ||||||||
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Ex. | ||||||||
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a PC which is leased for 5 years, where ownership is not transferred | ||||||||
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to the lessee at the end of the lease term, would still be a finance lease. | ||||||||
| The Last 3 criteria are suggestive in nature. | |||||||||
| May lead to classification as a finance lease, but not necessarily so. | |||||||||
| Ex. | |||||||||
| Where gains or loss from the fluctuation of the residual value is born by the lessee, | |||||||||
| it may indicate that the lessee in sustance is the owner | |||||||||
| (because he suffers the risks and enjoys the rewards) therefore the lease is a finance lease. | |||||||||
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Regards K.ilayaraja. |
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IF assets is on lease than it can otherwise not.
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