Hire purchase

Stat Audit 519 views 1 replies

 

Dear All,

I have a client who has various franchisees. He has entered into an agreement wherein the cost incurred by the Franchisee for the purpose of Setup of the Franchise will be re-imbursed by him in 4 year. Thus the payment made by him for assets and other setup cost are shown as Re-imbursement and the same is classified under Business promotion.

At the end of the 4th year, all the assets will be trfd to the Franchiser and he will show such assets at the last re-imbursement paid by him.

Is the treatment proper?

Replies (1)

It should be clarified whether during the 4 years, all the risks and rewards of the assets remain with the franchisees or with the franchiser. Also, at the end of 4 years, whether the franchiser gets custody of the assets reimbursed by him or only legal ownership is transferred to him? Responsibility of risks and rewards after transfer of ownership on completion of 4 years is also relevant in this regard. Please also clairfy whether the franchiser gets any benefits from the assets sponsored by him whatsoever or just a legal ownership is passed on to him after 4 years. This will be the factors determining correctness of asset recognised by franchiser. However, I am doubtful about capitalising only 4th year installment as cost of the asset (if at all he is entitled to capitalise it in his books). Either he should treat the entire amount as business promotion expenditutre or should capitalise the entire amount, depending on the factors mentioned above. Would like to hear others' views on this.


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