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How to account for land taken on lease?

Aniket Kumar (99 Points)

14 June 2020

For a land taken on lease by the government for 30 years, the following payment of Rs. one crore is made one time:

1. 60 lakhs - salami (equal to value of land)

2. 30 lakhs - rent for 30 years

3. 10 lakhs - cess for 30 years

How do I take entry of this payment in my accounts? Will it be an asset or an expense?

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23 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 14 June 2020

Since your the finance lease Lessor, derecognise the Asset first:

Lease receivables

To Lease Asset

when you received payments reduce receivables and:

Bank a/c

To Lease income a/c

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 14 June 2020

Since your the finance lease Lessor, derecognise the Asset first:

Lease receivables

To Lease Asset

when you received payments reduce receivables and:

Bank a/c

To Lease income a/c

Aniket Kumar (99 Points)
Replied 14 June 2020

Hello, I am not the lessor, I am the lessee.

My question is that, whether I have to record it as an expense or an asset.

If an expense, what amount in the three part of payment made (salami, rent and cess)?

If an asset, what amount?

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 14 June 2020

According to the new leasing standards, you have to record it as a Right to use asset. You have to account for expenses like depreciation and maintenance as well. Finally, you have to account for lease liabilities as well.

Aniket Kumar (99 Points)
Replied 14 June 2020

Thanks for the reply.

I am paying Rs 1 crore at once for 30 years and no more payment will be made in this period.

The 1 crore includes, 60 lakhs (salami), 30 lakhs (rent for 30 years) and 10 lakhs (cess for 30 years).

So I have to record the total payment of 1 crore as an asset and account for yearly depreciation

I have to record the 60 lakhs (salami) as an asset and the rest 40 lakhs (rent and cess) as an expense. In this case depreciation will be accounted on 60 lakhs only.

I have to record 60 lakhs (salami) as a security deposit and the rest 40 lakhs as an expense.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 14 June 2020

What is salami called in terms of Indian Tax please? Cess is allowed for motor vehicles. Is it allowed for leasing land as well?

Aniket Kumar (99 Points)
Replied 14 June 2020

I am not really sure about the cess but salami is a sort of security deposit but it has no mention of being returnable. If you can read Hindi, I can send you the document.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 14 June 2020

Hi Mr Aniket, this security deposit does not meet the criteria of lease contract. You have to give it a normal treatment. As per non refundable deposit, add it to current lease liabilities. When you pay the lease rental, record rental expense and expense non refundable deposit. This is a different treatment. The issue here is there is no valid evidence that revised IndAS 116 is working out this way. So check out the Mca.gov.in for further updates because the deposits future realisable value is discounted.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 14 June 2020

Oops I was preoccupied and suggested an err..as for non refundable deposit, treat it like a one time expense and expense it off. No need to include it in liabilities.