03 May 2024
How to Calculate RoU if intial lease period was 3 years w.e.f 01-09-2020 extended for 3 more years with 3% enhancement in monthly rent. Lease period was ended in September 2023 but allowed to further 3 months with existing rent, without execution any rent agreement. Initial monthly rent is Rs.1,00,000 Security deposit Rs.12,00,000 refundable at the vacating the premises.
11 July 2024
To calculate the Right of Use (RoU) asset for a lease, you typically consider the lease payments over the lease term, including any extension periods that are reasonably certain to be exercised. Here's how you can approach the calculation based on the information provided:
1. **Lease Term and Payments**: - Initial lease period: 3 years from 01-09-2020 to 31-08-2023. - Monthly rent: Rs. 1,00,000 (unchanged throughout). - Security deposit: Rs. 12,00,000 (refundable).
2. **Extension Period**: - Lease extended for 3 more years from 01-09-2023 to 31-08-2026. - Monthly rent after extension: Rs. 1,00,000 (assuming it remains the same). - The lease was allowed to continue for an additional 3 months beyond September 2023 without a formal agreement for rent change.
3. **Calculation Steps**: a. **Calculate Lease Liability**: - For the initial 3-year term: - Monthly rent: Rs. 1,00,000 - Total rent for 36 months: Rs. 1,00,000 * 36 = Rs. 36,00,000 - Add security deposit (assuming not included in monthly payments): Rs. 12,00,000 - Total lease liability for initial term: Rs. 36,00,000 + Rs. 12,00,000 = Rs. 48,00,000
- For the extended term (3 years): - Monthly rent: Rs. 1,00,000 - Total rent for 36 months: Rs. 1,00,000 * 36 = Rs. 36,00,000
- Total lease liability including extension: Rs. 48,00,000 + Rs. 36,00,000 = Rs. 84,00,000
b. **Calculate Present Value of Lease Payments**: - Use the discount rate provided by the company (usually the incremental borrowing rate). - Discount each year's payments back to present value. - For simplicity, assume a discount rate of 8% (this rate can vary based on company policy and market conditions).
c. **Determine Right of Use (RoU) Asset**: - The RoU asset is typically the initial measurement of the lease liability adjusted for any prepaid or accrued lease payments, initial direct costs, and any lease incentives received. - Since there are no explicit details on incentives or other adjustments provided, the RoU asset is generally considered equivalent to the lease liability in this scenario.
4. **Consideration for Additional 3 Months**: - Since the lease was allowed to continue for an additional 3 months without a formal agreement for rent change, this period would not impact the calculation of the initial RoU asset unless there are changes to the lease terms during this period.
5. **Accounting Entries**: - Dr. Right of Use Asset (RoU) account: Rs. 84,00,000 - Cr. Lease Liability account: Rs. 84,00,000
This calculation provides an overview of how to determine the Right of Use (RoU) asset for the lease based on the provided lease terms and payments. For precise accounting treatment and adjustments based on specific company policies and lease details, it's recommended to consult with a qualified accountant or financial advisor familiar with lease accounting standards (such as Ind AS 116 or IFRS 16) applicable in your jurisdiction.
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