Instruction No. 027-11-2016 on the Accounting Treatment of Various Lease Contracts

Le Governor of the Central Bank of West African States (BCEAO), Having regard to the Treaty of the West African Monetary Union (UMOA) of 20 January 2007, particularly Article 34; Having regard to the Statutes of the Central Bank of West African States (BCEAO), annexed to the UMOA Treaty of 20 January 2007, particularly Articles 30, 31, 32, 33 and 34; Having regard to the Uniform Law on banking regulation, particularly Articles 50, 51, 52, 53 and 54; Having regard to Decision No. 357-11-2016 of 15 November 2016 establishing the Revised UMOA Banking Accounting Plan and its annex, particularly Articles 75, 78, 84, 91 and 95, DECIDES

Chapter 1: General Provisions
Article 1
In application of the provisions of the Revised UMOA Banking Accounting Plan, banks and financial institutions with a banking character, hereinafter referred to as "subject entities", account for the various types of lease contracts under the conditions set out in this Instruction.

Article 2
For the purposes of this Instruction, the following expressions mean:
1°) Sale-and-leaseback contract: an instrument by which a user enterprise sells an asset to a person who immediately leases it back; 2°) Lease contract: an instrument by which a person grants another person the right to hold and use an asset for a fixed duration in exchange for the payment of rent; 3°) Finance lease contract: a lease contract that has the effect of transferring to the lessee substantially all the risks and benefits inherent in asset ownership, with or without transfer of ownership at the end of the contract; 4°) Operating lease contract: any lease contract other than a finance lease contract; 5°) Net investment: the gross investment in a lease contract discounted at the implicit interest rate of the lease contract; 6°) Implicit interest rate: the discount rate that equates, at the contract signing date, the original value of the asset and the sum of the discounted values of the rents and the residual value.

Article 3
Lease contracts meeting at least one of the following criteria may be classified as finance lease contracts:
– transfer of ownership to the lessee entity at the end of the lease; – purchase option under sufficiently favorable conditions to provide reasonable certainty that it will be exercised; – the contract term covers at least 75% of the economic life of the asset; – the discounted value of minimum payments is at least equal to 90% of the fair value of the asset subject to the lease contract; – losses associated with early termination of the contract are borne by the lessee entity; – possibility to continue the lease for a second period at a price significantly lower than market price; – the asset is of such a specialized nature that only the lessee entity can use it without major modifications. With regard to the criteria above, sale-and-leaseback contracts, leases with purchase options, and lease-to-own contracts are classified as finance lease contracts.

Chapter 2: Accounting for Finance Lease Contracts
Article 4
Subject entities acting as lessors treat finance lease transactions as a credit whose repayment is made through rents, which include a capital portion and interest. The accounting treatment is as follows:
1°) the claim constituted by the net investment corresponding to the leased asset is recorded on the balance sheet as an asset at the contract effective date; 2°) during the contract, rents are accounted for by distinguishing:
– financial interest determined based on a formula reflecting the implicit interest rate of the net investment; – the principal repayment portion of the claim.

Article 5
When there is an unpaid rent installment, the provisions of this Instruction regarding the accounting and assessment of impaired commitments apply.

Article 6
In case of non-exercise of the purchase option at the end of the contract or early termination, the asset is recorded in the subject entity's assets at the amount of the claim balance. It is amortized according to standard accounting rules.

Article 7
Subject entities acting as lessees treat finance lease transactions as an asset acquisition financed through interbank borrowing, whose repayment is made through rents comprising a capital portion and interest. The acquired fixed assets are amortized according to standard accounting rules.

Chapter 3: Accounting for Operating Lease Contracts
Article 8
Subject entities acting as lessors record on their balance sheet fixed assets subject to operating leases and amortize them according to standard accounting rules. They record as income the rents they collect to remunerate their investments and risks.

Article 9
Subject entities acting as lessors account for unpaid rent installments in the designated receivables accounts.

Article 10
Subject entities acting as lessees account for paid rents as rental expenses in the accounts provided by the accounting plan.

Chapter 4: Accounting for Sale-and-Leaseback Contracts
Article 11
When a sale-and-leaseback transaction results in the conclusion of a finance lease contract, the excess of sales proceeds over the book value is deferred and amortized over the term of the lease contract.

Article 12
If a sale-and-leaseback transaction results in the conclusion of an operating lease contract and is carried out at fair value, any net result must be recognized immediately. If the selling price is lower than fair value, any net result must be recognized immediately. Conversely, a loss compensated by future payments below market price must be deferred and amortized proportionally to the lease payments over the period during which it is expected that the asset will be used. In case of a selling price higher than fair value, the excess must be deferred and amortized over the expected useful life of the asset.

Chapter 5: Final Provisions
Article 13
This Instruction repeals and replaces all prior provisions dealing with the same subject. It enters into force on 1 January 2018 and will be published where necessary. Done in Dakar, on 15 November 2016 Tiémoko Meyliet KONE

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INSTRUCTION NO. 027-11-2016 ON THE ACCOUNTING TREATMENT OF VARIOUS LEASE CONTRACTS The Governor