One of my clients are involved in the business of importing medical equipment and hiring them out to hospitals. The company does not charge a significant payment from the customer in the initial stage, however recovers the investment through monthly rentals and consumables. The asset is used by the customer for the majority of its useful life at the end of which is returned back to the company who sells it for residual value. The risks and rewards do not transfer to the customer at any point of time. I would like to get information on the ideal treatment for these items in the books
Accounting treatment for assets on hire
Answers
It is like a fixed asset. The amortization would be a cost of goods sold. You can amortize it based on rental life, contract, consumables used....depends on asset and being consistent.
This makes it in line with the revenue.
Is your client RENTING or LEASING?
Are you asking about revenue recognition, or asset depreciation and balance sheet classification?
What personal property tax liability exists and who owes it?
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My client is renting the equipment out. I want to know the balance sheet classification and the tax liability falls on the client itself, not the customer
Per the Anon answer above, "It is like a fixed asset. The amortization would be a cost of goods sold. You can amortize it based on rental life, contract, consumables used....depends on asset ."
If your client sells it at residual value, then that is the targeted Net Book Value (NBV) after x months, and your monthly depreciation/amortization is based on the difference between Original Installed/Delivered cost and NBV over x months.
The VAT or Sales tax liability is based on the local laws. You can't contract out of that.
The personal property tax liability (USA style) is likely the equipment owner's liability, so it should be built into the calculation of the rental price. But, get professional advice on whether you need to file personal property tax returns.
The state income tax liability (USA) may be tricky- again get professional advice on whether the placement of the device in the customer's premises constitutes nexus for your client in that state/county/city.
Commercially, if your client doesn't understand the true costs of renting the device, they should get clarity and then decide on re-pricing the rental charges.
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Accounting