ING Lease

Belgium

Accounting

At the start of leasing in Belgium, the lessee had no obligation to record the operation on his balance sheet. He booked the leasing as an ordinary "renting" agreement and recorded the rental payment as an expense. There was for the lessee no registration on the passive side of his balance sheet of the long-term financial obligation.

This has led to the statement that in such case the annual accounts didn't give a precise and realistic view on the financial situation of the company and that leasing should be registered by the lessee.

The Royal Decree October 8, 1976, which fixes the format and contents of annual financial statements as well as the valuation and accounting principles, changed the accounting rules on leasing operations.

According to article 26 of this law, the accounting treatment of leases and similar contracts is no longer based on the legal title in the equipment but upon the principle of the economic ownership in the leased asset. This has as a result that the lessee will be allowed to depreciate the leased assets and this although he does not have any legal title to it. The lessee will have to record, both as a tangible fixed assets (in fact the rights he has for using it) and as a long-term debt, the total amount of the capital reimbursements included in the lease payments.

Each rental payment is registered as follows: the capital portion comes as a deduction to the debts and the remaining portion (i.e. interest) is recorded as a financial expense.The asset will be depreciated by the lessee, based upon the estimated useful life of the asset (which may be different from the contract term).

The lessor will record the total amount of capital reimbursements included in the leased payments as a long-term receivable. Each rental payment will be divided into a capital and an interest portion. The capital portion will reduce the receivable, the interest portion will be recorded as income.

Contracts that do not respond to the definition of leasing for accounting rules will not be recorded by the lessee in his balance sheet. He will book each rental payment as an expense. The lessor will book the asset under "III.F. Other Tangible Assets" and will depreciate it (a depreciation based upon the contract term is generally accepted). The rental payments will be booked by the lessor as income.

The definition of a "lease and other similar rights" is given in the annexes of Royal Decree October 8, 1976 and has been adopted by the Royal Decree December 3, 1993 for all operations concluded as from January 1, 1994.

This new definition aimed to harmonize the accounting rules with the fundamentals of the finance method. By doing so, the non-recording by the lessee of "full pay out" contracts (of movable properties) without purchase option (also called "renting") was eliminated. Operating lease contracts (of movable properties) with purchase options of 16% and more (which started at that time to be developed and which had to be registered by the lessee based upon the "old"definition) were on the other hand no longer treated as "finance" leases for accounting rules.

For operations (of movable property) with a purchase option, this new definition does definitely make the accounting rules more in harmony with the finance method and will have as an effect that the financial statements of the lessees will give a more precise and more realistic view on the financial situation of the company.Some fine-tuning will on the other hand, still needed for real-estate operations and for operations (with movable property) and "without" a purchase option.