Dear Fellow Members
I need your suggestions & explanations on below stated matter. If possible, please suggest with references of IAS.
An office is located in a bungalow, which is acquired on rent; the rent is paid in advance for a period of 1 year & the agreement is revised at the end of the term. It is mutually agreed that the bungalow will remain in the company’s possession for 5 – 8 years at least. We had to build rooms on the roof top, my question is whether I should charge it in the current year’s P&L or should I capitalize it & depreciate it.
My concern is the benefit of this construction is more than a period of one year. So I should capitalize it but the conflict is; it is built on a building which is acquired on rent.
Here we are talking of an operating lease and the relevant standard is IAS 17 Leases. Please also refer to IAS 40 Investment Property in case treatment of the operating lease can be covered as an investment property but the primary standard is IAS 17.
The prepaid rentals are to be amortised over the year into the p & l. Regarding the leasehold improvements, these are to be capitalised and amortised over the remaining period of the lease as per the lease agreement. You would also need to consider a provision under IAS 37 for any restoration work required post the lease period. Any incentives received for the initial lease should be amortised to p & l over the primary lease period.I think acquiring a building is operating lease as Qs did not mention
about subsequent ownership/ BPO even the lease term is also for short
In case of operating lease all annual rental paid is charge to profit
Construction over leaase asset could be capitalized as lease hold
improvement and amortize over lease term