sinking fund

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pulkit (Querist)
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14 July 2010 a facility management company is collecting and maintaining a sinking fund for replacement of capital equipments installed in a complex ,
my query is:

what will be the accounting treatment of this in the books of the company which is paying such amount , the paying company is a leasing company and is the owner of complex.

Also, after few payments, the complex is given on lease to another company and since then the lessee is contributing directly to the facility mgmt co. (as per the lease deed)

please clarify the accounting treatment in both the cases.

its urgent

CA SMR

CA SMR (Expert)
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13 August 2010 The query is not very clear.If the lessor is paying towards the sinking fund instrument say bonds ,for replacement of the capital asset leased out by them ,the accounting treatment in the books of accounts of the lessor will be,
Sinking Fund Dr(to be shown under long term assets/Investment)
To Bank
In the second case the accounting treatment of the sub-lease in the books of leasee is required.Assuming that this is operating lease,the lease income/receivable should be recognised over the term of sub-lease.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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25 July 2025 Here’s a clear explanation for **accounting treatment of sinking fund in the two scenarios you described**:

---

### Scenario 1:

**The paying company (leasing company and owner of complex) is contributing to sinking fund via Facility Management Co.**

* **What is a sinking fund?**
It’s a reserve fund set aside to accumulate money over time for replacing capital equipment in the future.

* **Accounting treatment in books of paying company (leasing company):**

* The sinking fund contribution should be recorded as an **expense or provision** under the relevant head (e.g., maintenance or replacement reserve).
* The amount paid to the facility management company is **debited to an asset or expense account** and credited to cash/bank.
* Simultaneously, recognize a **financial asset** or **receivable** from the facility management company if the sinking fund is maintained separately and controlled by them (if they hold the sinking fund on behalf of the paying company).
* Alternatively, if the sinking fund is just a pass-through, record it as an expense and facility management company as creditor until paid.

* **On the balance sheet:**

* Sinking fund is usually shown as a **separate reserve** or **fund** (if controlled).
* If it’s an expense, it reduces profit.

---

### Scenario 2:

**After leasing the complex, the lessee contributes directly to the facility management company as per lease deed.**

* **Accounting treatment in books of lessee:**

* The sinking fund contribution paid by the lessee is recorded as an **expense** (maintenance or sinking fund expense) in their books.
* Credit cash/bank and debit the relevant expense account.

* **Accounting treatment in books of the leasing company (owner):**

* Since the lessee pays directly now, the leasing company **will not record sinking fund contributions** from this point onwards.
* However, the leasing company should ensure that lease deed terms and facility management agreements are clear on this.

* **Facility Management Company books:**

* They recognize sinking fund contributions received from both owner and lessee as income or funds held in trust, depending on the agreement.

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### Summary Table:

| Aspect | Paying Company (Owner) | Lessee Company | Facility Management Company |
| ----------------- | ---------------------------------- | ----------------------------------- | -------------------------------------- |
| Before leasing | Expense or asset (sinking fund) | Not applicable | Receives contributions, maintains fund |
| After leasing | No sinking fund contribution | Expense (sinking fund contribution) | Receives sinking fund from lessee |
| Control over fund | May have control over sinking fund | No control over sinking fund | Controls and manages sinking fund |

---

### Important:

* **Disclosure:** Both owner and lessee should disclose the nature of sinking fund and their accounting policy in financial statements.
* **Lease agreement:** Should clearly specify who is responsible for sinking fund contribution.

---

If you want, I can help draft journal entries or policy notes for both companies. Would you like that?

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