Page 1 of 2 12 LastLast
Results 1 to 10 of 12

Thread: Smoothing Liability

Hybrid View

Previous Post Previous Post   Next Post Next Post
  1. #1
    Junior Member
    Join Date
    Jun 2011
    Location
    Cape Town
    Posts
    13
    Thanks
    4
    Thanked 0 Times in 0 Posts

    Smoothing Liability

    Hi Guys,

    Each year a financial audit is conducted on the company I currently work for.
    I've notice an account called smoothing liability, which relates to a 5 year finance lease agreement. Each year there is either a debit or credit to the income statement and balance sheet.

    What I'd like to know, is how is it calculated and why?

  2. #2
    Silver Member geraldenek's Avatar
    Join Date
    Jul 2008
    Location
    Somerset West
    Posts
    229
    Thanks
    19
    Thanked 112 Times in 80 Posts
    Hi JKS

    It is an IFR's standard were the total lease including yearly increases gets calculated for the 5 year period and then devided by 5 again to get the amount for the year.

    This amount has got nothing to do with tax and will be taken off the tax calculation and the correct amount incurred for the year will then be deducted.
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

  3. Thanks given for this post:

    JKS (31-Aug-11)

  4. #3
    Gold Member Mark Atkinson's Avatar
    Join Date
    Jul 2010
    Location
    Melbourne, Australia
    Posts
    796
    Thanks
    212
    Thanked 150 Times in 117 Posts
    Blog Entries
    12
    Hi JKS,

    I think what Geraldene is saying is the following:

    The correct accounting treatment of an operating lease is to record what we call equalised lease payments each year in your Statement of Comprehensive Income (Income Statement), as opposed to the actual payments for the year. The equalised lease payments, as Geraldene has pointed out, equal the total lease liability divided by the total number of lease payments.

    To my knowledge the smoothing account is used to record the differences each year between the actual lease payments and the equalised payments.

    So as an example:

    Say after determining your equalised lease payments, in the current year it happens to be R2000 higher than your actual lease payments.

    This would result in a Debit to the Income Statement (Increasing the lease payment from actual to equalised) and a corresponding Credit to the Balance Sheet (the smoothing account) to the amount of R2000.

    The effect is obviously exactly the opposite if the actual payment is more than the equalised payments.

  5. Thank given for this post:

    Dave A (30-Aug-11), JKS (31-Aug-11)

  6. #4
    Silver Member geraldenek's Avatar
    Join Date
    Jul 2008
    Location
    Somerset West
    Posts
    229
    Thanks
    19
    Thanked 112 Times in 80 Posts
    Thanks Mark - sometimes i'm not that good in explaining things.

    also want to mention that from last year it changed and only companies who need to comply with full IFR's needs to do this. As for SME's (which is most of the cases for companies) don't need to do this anymore.
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

  7. Thanks given for this post:

    Mark Atkinson (30-Aug-11)

  8. #5
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    22,648
    Thanks
    3,304
    Thanked 2,676 Times in 2,257 Posts
    Blog Entries
    12
    So essentially this applies to leases with a set escalation clause over the period of the lease?

  9. #6
    Gold Member Mark Atkinson's Avatar
    Join Date
    Jul 2010
    Location
    Melbourne, Australia
    Posts
    796
    Thanks
    212
    Thanked 150 Times in 117 Posts
    Blog Entries
    12
    Quote Originally Posted by Dave A View Post
    So essentially this applies to leases with a set escalation clause over the period of the lease?
    Yip. It would apply to any operating lease where not every payment is equal.

  10. #7
    Diamond Member wynn's Avatar
    Join Date
    Oct 2006
    Location
    east london
    Posts
    3,338
    Thanks
    548
    Thanked 625 Times in 524 Posts
    This is obviously used for a business trading in a Mall where a portion of the lease is tied to the turn over (say R1,000 per m2 and 5% of turnover)
    "Nobody who has succeeded has not failed along the way"
    Arianna Huffington

    Read the first 10% of my books "Didymus" and "The BEAST of BIKO BRIDGE" for free
    You can also read and download 100% free my short stories "A Real Surprise" and "Pieces of Eight" at
    http://www.smashwords.com/books/view/332256

  11. #8
    Silver Member geraldenek's Avatar
    Join Date
    Jul 2008
    Location
    Somerset West
    Posts
    229
    Thanks
    19
    Thanked 112 Times in 80 Posts
    Quote Originally Posted by wynn View Post
    This is obviously used for a business trading in a Mall where a portion of the lease is tied to the turn over (say R1,000 per m2 and 5% of turnover)
    Hi Wynn

    No you do it with lease agreements that is more than one year with a fixed percentage esculation. If the lease merely says "increases in line with CPI" then it would not need to be smoothed.
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

  12. #9
    Diamond Member wynn's Avatar
    Join Date
    Oct 2006
    Location
    east london
    Posts
    3,338
    Thanks
    548
    Thanked 625 Times in 524 Posts
    Quote Originally Posted by geraldenek View Post
    Hi Wynn

    No you do it with lease agreements that is more than one year with a fixed percentage esculation. If the lease merely says "increases in line with CPI" then it would not need to be smoothed.
    These are 5 year leases and the rate is partly calculated on 5% of the business turnover so you may have 30m2 @R1000.oo=R30,000.oo and if your turnover is R300,000.oo you pay an additional R15,000.oo so your total rent is 45,000.oo but next month your turnover is 350,000.oo your rent will increase by R2,500.oo
    It would also decrease proportionally if you have a bad month.

    I don't know if all Old Mutual Properties follow this formula but Vincent Park in East London does. (My figures are thumbsucks though)
    "Nobody who has succeeded has not failed along the way"
    Arianna Huffington

    Read the first 10% of my books "Didymus" and "The BEAST of BIKO BRIDGE" for free
    You can also read and download 100% free my short stories "A Real Surprise" and "Pieces of Eight" at
    http://www.smashwords.com/books/view/332256

  13. #10
    New Member
    Join Date
    Mar 2012
    Location
    Botswana
    Posts
    1
    Thanks
    0
    Thanked 0 Times in 0 Posts

    rental smoothing

    Quote Originally Posted by wynn View Post
    These are 5 year leases and the rate is partly calculated on 5% of the business turnover so you may have 30m2 @R1000.oo=R30,000.oo and if your turnover is R300,000.oo you pay an additional R15,000.oo so your total rent is 45,000.oo but next month your turnover is 350,000.oo your rent will increase by R2,500.oo
    It would also decrease proportionally if you have a bad month.

    I don't know if all Old Mutual Properties follow this formula but Vincent Park in East London does. (My figures are thumbsucks though)
    Hi guys I work for a firm which owns a small shopping complex. I have been following this thread and i shd say it has really interested me since I am having a small hick up with the smoothing process. A number of the tenants renewed their leases during the financial year 2011 and we are closing the books for 2011. the auditors want the smoothing schedule. what do i do with the tenants who renewed leases during the year. How do i bridge the gap between the old and new lease. Also some left during the year. Do i include the rentlas they paid in my smoothing? pliz help.

Page 1 of 2 12 LastLast

Similar Threads

  1. Workmens Compensation vs Professional Liability Insurance
    By MadJan in forum General Regulatory Compliance Forum
    Replies: 6
    Last Post: 22-Nov-10, 04:23 PM
  2. Unpaid Salary : Co Act, Kings Commision, Director Liability? any insight?
    By wesselskathy in forum Labour Relations and Legislation Forum
    Replies: 10
    Last Post: 21-Nov-10, 11:11 PM
  3. [Question] Liability when scammed ?
    By HAGGIS in forum General Business Forum
    Replies: 16
    Last Post: 16-Sep-08, 11:47 AM
  4. VAT: representative vendor liability
    By duncan drennan in forum Tax Forum
    Replies: 4
    Last Post: 25-Oct-06, 10:15 AM
  5. shifting card fraud liability from merchant to bank
    By duncan drennan in forum General Business Forum
    Replies: 2
    Last Post: 02-Oct-06, 08:48 AM

Did you like this article? Share it with your favourite social network.

Did you like this article? Share it with your favourite social network.

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •