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Operating lease – Lessee’s books

15 December 2008 6,740 views No Comment

Hi All,

Accounting of lease rentals for operating lease in lessee’s book is
ruled in IAS as under :

“Lease payments under an operating lease shall be recognised as an
expense on a straight-line basis over the lease term unless another
systematic basis is more representative of the time pattern of the
user’s benefit.”

My query is that when there is an escalation clause in the contract
how should the accrual be made over the total tenor of the lease; for
eg: refer following table, should the accrual be made as per option 1
or option 2.

Thanks to reply asap.

Regards
Deepak



Option 2, since you need to expense the exact amount over the total
period of the lease to the income statement, and only when it is
defined as an operating lease, meaning you have a fixed escalation
rate and definite period. If your agreement is indefinite period and
base escalation on CPIX rate (for instance), then you cannot make a
definite calculation and it falls outside the scope of IAS17.



Option 2 is the correct one .

rgds

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