I have a friend without an accounting background who works in an industry that installs proprietary equipment on the devices they sell. In the past, customers typically purchased and capitalized the equipment outright, then it shifted to an 11-year license/hire-purchase model. Now, due to economic conditions, customers don't want these assets on their books because capital expenditures have been cut. My idea is that they must transition to a pure lease without transferring ownership, thereby avoiding constituting a capital lease... This would essentially turn them into a leasing company, which would change the structure of their own financial statements and increase risk.

A complicating issue is that the equipment contains modules with intellectual property. Installing this $30,000 computer module requires about $12,000 in non-recoverable consumables, and they typically sell it at a markup for $60,000 including installation. I suggest charging 100% of the installation fee and proportional profit upfront, which the customer can expense, then leasing the computer component to them, which the customer expenses, while the lessor defers revenue recognition over the lease term. Essentially, they are financing the customer's operations.

I'm looking for an article or explanation aimed at non-accountants. He has a good idea but still thinks the customer will amortize the asset over the lease term; I said no, the customer expenses it, and he doesn't really care how the customer treats it on their books as long as it meets the customer's need to reduce capital expenditures. I think the 11-year hire-purchase term was driven by the customer's amortization/capital cost allowance (CCA) plan.

I'm looking for an article showing how they should present these assets and related liabilities on their own books under IFRS, as well as installation revenue and deferred lease revenue. My friend asks how to calculate the lease amount; I said it depends on their cost of financing inventory, internal rate of return (IRR), etc. They basically want to recover the cost of the computer component within 2-3 years and treat the last two years of the 5-year lease as profit. If the customer cancels before the end of year two, they charge an asset recovery fee; if canceled after that, they take the asset back for free, write down deferred revenue, and try to reuse the asset. I also wonder if there are CICA references in addition to IFRS.

This needs to comply with Canadian standards, not US GAAP.

Additionally, if someone experienced has calculated lease payments to cover financing costs, capital asset costs, profit, etc., that would also be helpful.

Thank you.