Lease Rent as per IND AS116

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Sujith (Querist)
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13 May 2024 What will the impact as per IND AS 116, if after end lease period, Building owner not extending the lease agreement but allowed 3 months to occupy before shifting for shifting office.
1. 3months rental expenses to be booked as normal rent expenses.
or
2.To modify RoU taking into account 3months allowed by the building owner.

Please suggest.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 July 2024 Under IND AS 116 (Indian Accounting Standards 116), which deals with leases, the treatment of the situation where the building owner allows an additional 3 months of occupancy after the lease period ends would typically be as follows:

### Initial Recognition and RoU Asset:

1. **Recognition of Right-of-Use (RoU) Asset and Lease Liability:**
- Initially, when the lease commenced, the lessee (the tenant) would have recognized a Right-of-Use (RoU) asset and a corresponding lease liability based on the present value of lease payments over the lease term.
- This RoU asset represents the lessee's right to use the leased asset (in this case, the building) throughout the lease term.

### Impact of Extension of Occupancy:

2. **Extension Period (Additional 3 Months):**
- If the building owner allows the tenant to occupy the building for an additional 3 months beyond the lease term without extending the lease agreement formally, the accounting treatment will depend on the nature of this extension period:

- **Normal Rent Expenses:**
- If the additional 3 months are treated simply as a continuation of the original lease term (where no significant lease payments are required beyond what was already accounted for), the rental expenses for these 3 months would generally be booked as normal rent expenses.
- This means the lease liability would not increase further, and the RoU asset would continue to be amortized over the original lease term.

- **Modification of RoU Asset:**
- If the additional 3 months involve a significant increase in lease payments or represent a material change in the lease terms (such as rent-free period or reduced rent), then the RoU asset may need to be reassessed and adjusted.
- This would involve recalculating the RoU asset based on the revised lease payments over the extended period, considering any rent-free periods or reduced rents during this period.

### Practical Considerations:

- **Accounting Judgment:**
- The determination of whether the additional 3 months qualify as a modification requiring adjustment of the RoU asset involves judgment.
- If it is determined that the terms of the lease have materially changed for this extended period (e.g., if rent-free is provided or if the rent structure significantly changes), then adjusting the RoU asset to reflect the updated lease payments would be appropriate.

- **Disclosure:**
- Ensure appropriate disclosure in the financial statements regarding the extension of occupancy and its impact on the RoU asset, lease liability, and rental expenses.
- Provide clarity on how the lease terms have been assessed and any adjustments made to the RoU asset in light of the extended occupancy period.

### Conclusion:

The exact treatment would depend on the specific terms and conditions of the extended occupancy period. Generally, if the extension does not significantly alter the financial terms of the original lease agreement, booking the rental expenses for the 3 months as normal rent expenses would be appropriate. However, any material changes in lease terms during this period would necessitate a reassessment and potential adjustment of the RoU asset under IND AS 116. It is advisable to consult with a qualified accounting professional to apply these principles correctly to your specific situation.