Lease equilisation reserve
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
26 April 2014
what is the condition for making of lease equilisation reserve
CA Sarthak Jain
(Expert)
26 April 2014
Paragraph 23 of AS-19 (Leases) issued by ICAI relating to treatment of Operating Leases requires a lessee to recognize lease payments made under the agreement as expense in P/L on straight line basis (SLM basis) unless another systematic basis is more representative of time benefits derived from use of leased asset.
Practically, lease agreements contains annual/periodic increments in lease rentals during the period of lease but since as per para 23, lessee is required to recognize lease rent on SLM basis, he calculates the total rent payable during the lease term as per agreement (taking into consideration the increments applicable)and divide the same with lease period. This figure is straightlined rent and recognized as expense each year but payment is made as per agreement (According to each year rent mentioned therein). The difference between the two (expense recognized and payment made) is taken to a separate account called "Lease Equalization Reserve". The same gets reversed in later years.
Hope this clarifies
Regards
Practically, lease agreements contains annual/periodic increments in lease rentals during the period of lease but since as per para 23, lessee is required to recognize lease rent on SLM basis, he calculates the total rent payable during the lease term as per agreement (taking into consideration the increments applicable)and divide the same with lease period. This figure is straightlined rent and recognized as expense each year but payment is made as per agreement (According to each year rent mentioned therein). The difference between the two (expense recognized and payment made) is taken to a separate account called "Lease Equalization Reserve". The same gets reversed in later years.
Hope this clarifies
Regards
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