Lease of land

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jitin (Querist)
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26 May 2014 Pl clear the following queries

1. if land has been taken on perpetual lease, at what value will we show the land in books of lessee (asset side) in each year.

2. if land has been taken on lease for a limited period, then what will be the accounting treatment of land in books of lessee (asset side)

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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26 May 2014 that will depend whether its finance lease or operating lease.

jitin

jitin (Querist)
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27 May 2014 Dear Tushar,

Thank you for the prompt reply. However, please correct me if I am wrong but AS-19 on lease does not applies to land . So classification of lease on land as finance or operating is inappropriate.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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27 May 2014 Jitin,

for perpetual lease, you can book the land at the premium paid for the same.

for limited period lease, you dont recognize land as an asset and just pay the rent periodically.

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jitin

jitin (Querist)
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27 May 2014 Dear Nikhil,

Please clarify what does premium paid for land means here.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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27 May 2014 normally for perpetual leases, a lumpsum amount is paid. that is called as premium.

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jitin

jitin (Querist)
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27 May 2014 One related query.

What if in a perpetual lease, some amount has been paid as lumpsum and the remaining is being paid in annual rentals.

In the books of lessee, should we charge rentals to P & L account ?

Will the lumpsum only be capitalized or the rentals too ?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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02 August 2024 In the case of a perpetual lease where a lump-sum amount is paid upfront and the remaining lease amount is paid as annual rentals, the accounting treatment should be carefully considered. Here’s how you can handle it:

### **Accounting Treatment for Perpetual Lease:**

#### **1. Lump-Sum Payment:**

- **Capitalization:** The lump-sum payment made for acquiring the perpetual lease should generally be capitalized in the books of the lessee. This amount represents the cost of acquiring the lease rights, which provides benefits over a long period.
- **Treatment:** Record this lump-sum payment as a leasehold improvement or an intangible asset in your books. You should not expense this amount immediately but rather amortize it over the period of the lease or its estimated useful life if applicable.

**Journal Entry:**
```
Leasehold Land / Leasehold Improvement (Asset Account) Dr
Bank / Cash Cr
```

#### **2. Annual Rentals:**

- **Expense Recognition:** The annual rentals paid for the lease should be charged to the Profit & Loss (P&L) account as they are incurred. These rentals represent the cost of using the leased property for the current year.
- **Treatment:** Since the annual rentals are recurring expenses related to the ongoing use of the property, they should be treated as an operating expense.

**Journal Entry:**
```
Rent Expense (P&L Account) Dr
Bank / Cash Cr
```

### **Summary of Treatment:**

1. **Lump-Sum Payment:**
- **Capitalized:** Capitalize the lump-sum payment in the books as a leasehold asset.
- **Amortization:** Depending on the nature of the lease, amortize the capitalized amount over the lease period or its useful life.

2. **Annual Rentals:**
- **Expensed:** Charge annual rental payments to the P&L account as they are incurred.

### **Additional Points to Consider:**

- **Lease Classification:** Ensure that the lease is classified correctly under the applicable accounting standards. For instance, under Indian GAAP or Ind AS, leases are typically classified into finance leases or operating leases, which can affect the accounting treatment.
- **Consult Standards:** Refer to accounting standards relevant to your jurisdiction. In India, for instance, Accounting Standard (AS) 19 deals with leases under Indian GAAP, and Ind AS 116 covers leases under Ind AS.

### **Practical Example:**

Let’s say you have a perpetual lease with the following terms:
- Lump-sum payment of ₹10,00,000.
- Annual rentals of ₹1,00,000.

**Accounting Entries:**
1. **Lump-Sum Payment:**
```
Leasehold Land (Asset) Dr 10,00,000
Bank / Cash Cr 10,00,000
```

2. **Annual Rentals:**
```
Rent Expense Dr 1,00,000
Bank / Cash Cr 1,00,000
```

**Amortization (if applicable):**
- If the lease is to be amortized, you would need to create an amortization schedule and account for this expense over the lease period.

By adhering to these accounting treatments, you can ensure that your financial statements accurately reflect the costs associated with the lease and comply with accounting standards.

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