Lease hold land amortization

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This query is : Resolved

mahak katyal (Querist)

02 May 2012 i recently saw an annual report in which leasehold land was amortized during the period of lease.
can yu please substantiate it and provide reasoning behind it?
Depreciation obviously cant be claimed as it s not covered by AS 10.

Guest

Guest (Expert)

02 May 2012 As per my opinion the amortization on leasehold property shall be such that it should be consistent with that of the freehold/ owned assets.

if there is no reasonable certainty that the company would obtain ownership of the leasehold building by the end of the lease term,the leasehold building should be fully depreciated
over the lease term or the useful life of such building,whichever is shorter

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Sanjay Chauhan (IFRS)

Sanjay Chauhan (IFRS) (Expert)

19 May 2012 Technically leasehold land is not directly covered in AS 10.

Taking reference from US GAAP, leasehold land is considered as prepayment and is amortised like a prepaid expense.

However under IFRS implementtaion and under Indian GAAP, we go with the substance rather than form.

Since Land has unlimited life, it can never be considered as finance lease. Hence if an entity has secured a long term lease of land, it is considered as a capital outflow whose benefit is going to be accrued over the period. Since it cannot be considered as finace lease, entity park the leasehold land in Fixed Asset Schedule and amortise it over the lease term.

If the lease rights are freely transferable and satisfy the criterion of AS 26 - Intangible assets, they should be classified as Intangibles and amortised over its useful life.

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