CA Manish (Job) (5264 Points)
29 December 2015 Is requirement of rent equalization or recording the rent on straight line basis is mandatory?
If there is an escalation clause in the agreement e.g. rent is increased every year or once in a two year by 15% or so can we record the rent on the basis of actual amount.
Thanks....
Mayur Kashinpure
(Student)
(341 Points)
Replied 29 December 2015
Recording the rent on straight line basis is not mandatory. It should be recorded on the basis of ratio of future economic benefits over the period of lease; in case such ratio is unavailable, then you need to record it on equal basis.
In case os escalation clause in the agreement, you can record it on actual rent basis, if you consider that the ratio of actual rent received over the period is same of ratio of future economic benefits over the period of lease.
CA Manish
(Job)
(5264 Points)
Replied 29 December 2015
Thanks for your responce....
One more question is how to demonstrate the ratio of actual rent received over the period is same of ratio of future economic benefits over the period of lease to the Auditor.
Thanks in advance....
Mayur Kashinpure
(Student)
(341 Points)
Replied 29 December 2015
The ratio of future economic benefits depends on usage of the lease asset in the business.
Suppose for instance, you have taken a truck on lease for 10 years and you have planned to make 1000 trips here and there in those 10 years, then the benefit ratio would depend on the number of trips that you make every year.
Since in most of the businesses, it becomes difficult to find out the ratio; rent is equalised.
You could explain this to your auditor in context of your business.
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