Lease accounting as per Ind AS 116

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vinod sahu (Querist)
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09 February 2024 Hello
Could you please suggest what will be the accounting treatment of one time upfront charges paid to government for purchase of industrial land on lease , Annual lease component is separately shown in the compensation charged by the government...?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 July 2024 The accounting treatment of one-time upfront charges paid to the government for the purchase of industrial land on lease involves capitalizing these charges as part of the cost of acquiring the leasehold land. Here’s how you can approach it:

### Initial Recognition:

1. **Capitalization of Upfront Charges:**
- The one-time upfront charges paid to the government, which are directly attributable to acquiring the leasehold land, should be capitalized as part of the cost of the leasehold land.
- These charges typically include fees for acquiring the lease, registration fees, stamp duties, and any other initial charges directly related to obtaining the lease.

2. **Recording the Transaction:**
- Debit the leasehold land account (an asset account) with the total amount paid as upfront charges.
- Credit the cash or bank account (depending on the payment method) for the same amount.

### Subsequent Accounting:

3. **Annual Lease Payments:**
- Separate annual lease payments made to the government for the use of the leasehold land should be expensed as incurred.
- These lease payments are typically recognized as operating expenses in the period they are due, reflecting the periodic cost of using the leased land.

### Example:

- Suppose your company pays ₹10,00,000 as one-time upfront charges to the government for acquiring a leasehold land.
- The accounting entry would be:
```
Leasehold Land (Asset) ₹10,00,000
Bank/Cash (Payment) ₹10,00,000
```
- Each year, if there are annual lease payments of, say, ₹1,00,000, these payments would be expensed in the respective accounting periods:
```
Lease Expense (Operating Expense) ₹1,00,000
Bank/Cash (Payment) ₹1,00,000
```

### Disclosure:

- **Financial Statements:** Ensure that the upfront charges capitalized and the subsequent lease payments expensed are clearly disclosed in the company's financial statements.
- **Notes to Accounts:** Provide detailed notes explaining the nature and amount of these charges, their treatment as part of the cost of leasehold land, and the method used for recognizing annual lease payments.

By following these accounting principles, your company can accurately reflect the acquisition cost of leasehold land and the ongoing expenses associated with leasing it from the government in its financial statements. If you have specific requirements or additional complexities in your situation, it's advisable to consult with a professional accountant or financial advisor for tailored guidance.