Non refundable VAT 3

After several rounds of comments [thank you, all contributors], there is now a best practice for the processing of non-refundable VAT.

The underlying intention of the article is to show the consequences of the inclusion of operational leases on the balance sheet when applying IFRS 16, the new international accounting standard for lease transactions, which must be followed by listed companies from 1 January 2019.

In many situations, the dilemma then arises what exactly to activate on-balance sheet in the case of operating leases as the calculated VAT on the transaction, which in the case of finance leases is usually paid in advance (charged on to the lessee), is only charged to the lessee by the lessor on a period-by-period basis .

The various reactions received since the start of this subject’s discussion show that many assume that all leases will now become finance leases. Therefore, all leases are to be treated equally in administration.

In fact, however, both operating and finance leases will continue to exist as they were, with, only for accounting purposes (from an accounting perspective), the same accounting entries, in accordance with the existing accounting method for finance leases.

Further consider this: IFRS dictates the same accounting method for lessees, not for lessors, where everything remains the same for accounting purposes.

The best practice proposed in the attached article means that VAT due in the future, and which has not yet been invoiced, will never be capitalised.
Also not by those companies/institutions that have non-refundable VAT expense. With example-journal entry bookings!