Keval (Consultant) (120 Points)
05 September 2011Dear All,
This is the query regarding rent equilisation applicability, where rent agreement contains the below mention clause
1) In first year rent will be540000(P.M) + service tax
2) second year rent will be570000(P.M) +service tax
3) third year rent will be600000(P.M) + service tax
Is rent equilisation necessary for accounting purpose if the above mentioned clause is there in rent agreement and if it is where it is mentioned.
Warm Regard
KRS
Keval
(Consultant)
(120 Points)
Replied 06 September 2011
Dear Prabeer,
I have gone throught one rent agreement of leased premises with lock in period of 3 year. Where leasee has to pay to the lessor rent in following way:-
1) In first year rent payable by the lessee will be 1000000(P.M) + service tax (F.Y. 2010-11)
2) second year rent payable by the lessee will be 1200000(P.M) +service tax (F.Y. 2011-12)
3) third year rent payable by the lessee will be 1500000(P.M) + service tax (F.Y. 2012-13)
Lease nature is of operating lease.
Now my query is about rent equilisation. In the books of lessee is rent equilisation has to be done if the rent agreement contains above clause?
If yes, then how it would be done?
Prabeer
(B. COM (H) CA & CS Final)
(5484 Points)
Replied 07 September 2011
Please refer to the below mentioned link, this may be of some help to you-
Keval
(Consultant)
(120 Points)
Replied 07 September 2011
Prabeer,
I have already referred to that link but the think link.
But so far I have heard about rent equilisation is that "it is necessary only when escalation clause is there in rent agreement."
Prabeer
(B. COM (H) CA & CS Final)
(5484 Points)
Replied 07 September 2011
But in your case the rent has already been predefined / fixed.
Keval
(Consultant)
(120 Points)
Replied 07 September 2011
yes in my case rent is already predefine/ fixed
so, whether it is necessary to do rent equilisation or not.
I have referred to AS-19 but i was not able to make out whether it is necessary or not? pls guide.
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 13 September 2011
Well under non cancellable operating leases (International Accounting Standard)the lease rental are expensed out on a straight line basis (rent equalisation) as minimum lease rents and i believe that indian accounting standard will also be in line with that.
It is not to be straight line only when some systematic basis is there to defined the rent. eg. if the increase in rental is linked to increase in revenue of the company then in such case the rent is not straight lined which also meets the matching prinicple of accounts.
Let me know if u are not clear.
Keval
(Consultant)
(120 Points)
Replied 13 September 2011
Dear Mr. Rastogi,
So far I understood you want to say that rent equilisation will not be applicable as the systematic basis is already defined in the agreement itself. Please correct me if I have misconception.
As regard to your example I was not able to understood. As in case which I mentioned above is the case of rent payment and not the case of rent receipt so there is no question of increase in revenue. Please guide.
Regards
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 14 September 2011
Well Keval , suppose you have taken a premise on lease where u will run your business. Considering your business the lessor has framed the rental agreement in such a way that increase in rental expense for youis linked to the increase in revenue of your business. This is done to ensure that in the early years when the business will be low the rent will be low and in the later years as the business grows up your rental expense will also go up. This is a purely a commercial rental deal done between you and the lessor.
Thus, in above case you need to demonstrate to the satisfaction of the auditor that these rents are linked to the increase in revenues and in this case there is no need to straight line the rental expense over the lease period as there is systematic basis available.
In case of vice versa the total rental expense will be straight lined for charging to the income statement. I hope this will clarify your doubt.
Further, practically there are many rental deeds where a grace period is normally given to the lessee to set up its business so what do you think that should a lesse provide any rental expense for such grace period?
Keval
(Consultant)
(120 Points)
Replied 14 September 2011
Thanks Mr. Rastogi, I think that I have understood.
I think that in grace period provision of rental expense depends upon the agreement. If the rent agreement is linked with revenue then rent expenses may not be provided as it would not be in tune with matching concept. Else, if vice versa is the case, then rent expenses may be provided on Straight line basis irrespective of the grace period.Please let me know if it is correct or not.
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 14 September 2011
Yes, Keval your understanding is correct. You have to provide the rental expense in the grace period if there is no systematic way to link the rental expense with any other factor. This is in line with SIC -15 Lease incentives (International Accounting Standards). copy attached for your reference.
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