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If we acquire inventory to support an outsourced supply chain contract using a capital lease, do we need to recognize depreciation on the inventory like we would if the asset was a machine

wayne ackerman's Profile

We own the inventory and have it on our books.  Each time a part sells we relive the inventory through COGS and replenish that part from the sale proceeds, effectively tuning the inventory six times a year while keeping the balance stable. (Approx $5MM) .  

Answers

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Treat the inventory as you would any inventory that you hold. Based on your replenishments, you can make entries to charge this to COGS. I would attempt to never depreciate inventory

Damon Butler
Title: CFO
Company: The Protective Group, Inc.
(CFO, The Protective Group, Inc.) |

I'm not sure how you acquired inventory through a capital lease in the first place, but inventory is inventory and fixed assets are fixed assets and ne'er the twain shall meet.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

How would a company convey title to what they sold, if it were leased?

For that reason, I agree with Damon, that it would be quite impossible to find a lessor (but never say totally impossible, stranger things can happen).

Topic Expert
Richard Claiborn
Title: CFO
Company: In Transition
(CFO, In Transition) |

It sounds like you're borrowing money via a "lease" and using it to buy inventory. They should each be treated accordingly. Borrowing is liability and inventory is a current asset (in most cases).

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Forget why you acquired the inventory. The capital lease has no role in the treatment of the inventory. Depreciation, Impairment, Depletion are not used for inventory...so that's out. However, you do have the option when the value of your inventory falls below market value to make an adjustment, i.e. Lower of Cost or Market (LCM). This can be performed by either a write down to ending inventory or record adjustment to market in a contra asset account. But if you are turning your inventory six times a year, marking it down does not seem logical, as it is not sitting.

Sorry, I am very confused with the question.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

The "lease" rules, capital or otherwise, do not apply to inventory. You have an installment purchase agreement, which may or may not be non-cancellable [take or pay], Record inventory as you would if acquired under any other arrangement.

(Agent, JKS Solutions, Inc.) |

Regardless of the form of the deal, proper accounting requires determining the fair market value of each of the multiple elements. The lease is the financing vehicle, so think of the payments as loan payments. In this case, you will need to determine the value of each of the elements and set up liability accounts for each stream and follow the US GAAP related to the particular carve out element. As mentioned inventory is an operating asset and cannot be depreciated - whether it is inventory held for sale or held as raw materials.

For a simple example: Capital lease on a medical lab chemical analyzer has a monthly payment of say 11,000, after asking the lessor to value the cost of the supplies included in the deal, 9,200 per month is related to lab supplies, 1,800 is related to the value of the capital lease obligation liability. Therefore the chemical analyzer asset will be determined using the 1,800 portion of the lease payment. The 9200 is free standing expense.

For the part of your deal that is related to the acquisition of Inventory, you will have to work with the deal maker and determine the cost stream for inventory amounts and this amount will land outside the capital lease asset value.

It is best to obtain written documentation from the deal maker or capital lessor that itemizes all the values. This way, you will have less to substantiate for the IRS when it comes knocking.

Multiple element deals are fun. After you carve out all the elements you might find you are sitting on an operating lease for your facility after all.

Best.

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