Taxes and Accounting

Effective from January 1, 2004, legal regulations came into force that significantly influenced leasing operations. These legislative amendments are reflected in the Act No. 595/2003 Coll. on Income Tax and in the Measure of the Ministry of Finance of the Slovak Republic No. 25167/2003-92 of December 11, 2003, which modifies and supplements details on accounting procedures and the framework chart of accounts for entrepreneurs using the double-entry accounting system. These legislative changes apply to financial lease agreements concluded after January 1, 2004.

The Income Tax Act primarily defines financial leasing as "the leasing of assets with an agreed right to purchase the leased item, whereby ownership of the leased item is transferred from the lessor to the lessee without undue delay after the lease term ends, and the lessee depreciates the leased asset during the lease period...".

It further sets the conditions for recognizing lease payments as tax-deductible expenses for the lessee, including the minimum lease period, which must represent at least 60% of the depreciation period of tangible assets and no less than three years, and the maximum purchase price, which must not exceed the residual value of the asset as determined by straight-line depreciation according to this law.

The final condition is that lease payments are considered a tax-deductible expense only in the amount exceeding the depreciation claimed by the lessee, evenly included in the tax base throughout the lease term.

The Ministry of Finance measure also defines the term "financial lease," establishes key concepts, and outlines the principles for recording financial leases in accounting. The value of the leased asset is considered the principal, while the lease value is considered unrealized financial income. The total installment amount remains the same, but the structure of the installment is uneven; the portion corresponding to the principal increases while the portion related to the financial lease decreases. Financial leasing includes interest and insurance.

How to Account for Financial Leasing?

The new financial lease accounting system incorporates principles and procedures largely analogous to accounting practices in European Union countries, ensuring that our accounting system aligns with their financial reporting standards.

The accounting procedure is adjusted based on the terms of the leasing contract while adhering to applicable accounting practices.

1. Payments before the delivery of the leased asset are considered advance payments and are recorded in the usual manner – Debit (MD) as Advance Payment and VAT, Credit (D) as Payment.
2. Acceptance of the asset by the lessee is recorded on the date of asset receipt as a Debit (MD) entry on the relevant asset account and as a corresponding Credit (D) entry on Account 474 – Lease Liabilities, at the principal amount, i.e., the value of the leased asset.
3. The lessee records the asset depreciation up to 100% of the acquisition cost determined by the lessor, using a straight-line method and allocating a proportional amount to each calendar month of the lease. The first depreciation can be claimed in the month when the asset was received in a condition suitable for contractual or standard use. Depreciation is recorded using the standard method – Debit (MD) as Depreciation, Credit (D) as an Increase in Allowances for the respective asset category.
4. After asset delivery, it is necessary to reallocate pre-delivery lease payments from advance payments to lease liability reduction: Debit (MD) 474 – Lease Liabilities with a corresponding Credit (D) entry for Advance Payments.
5. On the due date of agreed lease installments, the lessee records the installment as follows:
   • Principal of the installment: Debit (MD) 474 – Lease Liabilities
   • Interest of the installment: Debit (MD) 562 – Interest
   • Insurance of the installment: Debit (MD) 568 – Other Financial Costs
   • VAT: Debit (MD) 343 – VAT
   • Payable amount: Credit (D) 474 – Lease Liabilities

It is recommended to establish two analytical accounts under 474 – Lease Liabilities: one for recording unpaid principal and another for the portion of the installment due. Additionally, interest and insurance should be recorded separately.

Besides recording individual leasing transactions, it is also necessary to maintain off-balance sheet records, and the information from these records must be included in the Notes to the Financial Statements.

The basis for recording lease payments is either a payment schedule or an invoice from the lessor, specifying payment details, lease structure, and value-added tax.

Lease installments may not be evenly distributed over the lease term or fit into the standard accounting period. However, in accounting, interest, including insurance, is recorded precisely as per the breakdown in the lease payment schedule. For tax purposes, an adjustment must be made to ensure even lease expenses throughout the lease term.