Operating Lease Accounting Handbook for Lease-Here, Pay-Here
Trevor Watson | December 16, 2019
Many Lease-Here, Pay-Here dealerships started as Buy-Here, Pay-Here dealers, building a portfolio of retail installment sales contracts (RISC) that appear on their balance sheet as a large asset of receivables. The accounting method for recognizing the individual loans and the monthly payments is very common and familiar to most dealer principals and their Controllers.
At some point, the dealer principal discovers the laundry list of benefits to Lease-Here, Pay-Here, and decides to make the transition. There are a few small hurdles in the process; a migration to a LHPH compatible DMS, a new lease contract instead of the old RISC, some basic training for his or her staff to understand the Language of Leasing, and they are off and running. (You can find all of this information in our free E-Book here.)
After the transition, there is one piece where we get a few questions from the dealers, simply because it is a little different than what the Dealer and their Controller are accustomed to: Operating Lease Accounting. Unlike the BHPH method of accounting where the loan goes on the books as a large receivable, with Operating Lease Accounting, the lease is recognized on their books as the ACV of the underlying vehicle and the payments are then recognized as revenue on a monthly basis.
The benefits of this method allow for the dealerships to enjoy the favorable tax treatment of the lease by booking depreciation and using the depreciation to offset their annual income. For many dealers, this means a large percentage (or the entirety) of their annual tax liability will be deferred for years to come.
We recently developed an Operating Lease Accounting Handbook to help our dealers remain compliant with the GAAP rules surrounding Operating Lease Accounting and enjoy this substantial benefit of LHPH. As always, you should consult with your own tax professional to ensure you conform to all local, state, and federal regulations.
If you would like to read our new handbook, give us a call at (619) 222-9990 x 1010 or email us at TWatson@LHPH.com to learn more.