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Can we capitalize the rent on the new building???

Navneet (Asst. Finance Controller (Alshaya India)) (42 Points)

12 August 2015

Dear All,

Our Company has rented a new building adjacent to our existing premises. We are currently paying rent of 5500 each month and totalling to 66,000 a year. My query in this regard is that as per the IFRS can we in anyway capitalize the rent we pay for the new building even if the annuexure building works are not yet completed.??? Upon enquiry with some they have stated that we cannot capitalize the rent and the same has to be expensed as per IFRS.

Kind opinions from our experts are invited.

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7 Replies

MOHIT KUMAR JAIN (CFO) (68 Points)
Replied 02 September 2015

What is the tangibile asset being created in this case for triggering Ind AS 16?

Navneet (Asst. Finance Controller (Alshaya India)) (42 Points)
Replied 02 September 2015

Is there a requirement for a tangible asset. All the standard requires is an asset and i feel it need not be tangible

MOHIT KUMAR JAIN (CFO) (68 Points)
Replied 03 September 2015

What is the asset being created here?

Navneet (Asst. Finance Controller (Alshaya India)) (42 Points)
Replied 04 September 2015

Can we consider " the right to use the building" as the asset generated here.

Avanish Soni ( ) (47 Points)
Replied 10 September 2015

No, since its not a finance lease, you cannot create an asset, you'll have to expense in p&l.

MOHIT KUMAR JAIN (CFO) (68 Points)
Replied 12 September 2015

The subject of right to use is covered in Ind AS 17 Leases. The below example should make the concept clear -

An entity holds a property that it owns to earn rentals and for capital appreciation.
It enters into an agreement whereby it conveys to an independent third party in
return for payment of Rs1,000 per year the right to use the building for ten years.The arrangement is a lease—it is an agreement whereby the lessor (the entity) conveys to
the lessee (the independent third party) in return for payment or a series of payments
(payment of Rs 1,000 per year) the right to use an asset (the building) for an agreed
period of time (ten years).

From Lessor’s perspective
The property is an investment property. The measurement of the investment property is
outside the scope of Ind AS 17. The investment property is accounted for in accordance with Ind AS 40 Investment Property. However, the lease income is accounted for in accordance with Ind AS 17.

From Lessee’s perspective
The lease is accounted for in accordance with Ind AS 17. This is an operating lease and would need to be expensed in lessee's books.