Capitalization of repairment expenses
22 February 2009
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6 Comments
Dear All,
The company use a buillding under operation lease, company just pay lease payments to the owner of the building and there is no intention in the future to get any legal rights on this building. The repairement of the building was performed by the lessee company. According to IFRC, can the repairment expenses treated as Property, Plant and Equipmrnt or intangible assets and be capitalized respectively? thank you
Salome
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Dear Salome,
as you said there is an operation lease (and not financial),therefore all the payments you make for the lessor company are expensed in P&L as rent expenses, and not interest expense as in the case of financial lease.
Now, for the repairment of the building, as it is not your property, you should expense in P&L. Anyway, also in the case of financial lease, the repairment of the building I would consider in P&L and not capitalised.
Adrian
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Dear Salome,
The repair expenses represent an increase in minimum lease payments to be apportioned over the remaining life of the lease on straight line basis.
Regards,
CA Manish Iyer
+919825286903
Dear All Experts,
In following case Lease is in nature of Operating Lease and The repairement of the building was performed by the lessee company are in Revenue Exp in Nature so in this case it should be expense out in income statement.
If it would other wise following stand true.
Leasehold improvements are improvements to property not owned by the party making these investments. For example, a lessee of office space may invest its funds to install partitions or to combine several suites by removing certain interior walls. Due to the nature of these physical changes to the property (done with the lessor’s permission, of course), the lessee cannot remove or undo these changes and must abandon them upon termination of the lease, if the lessee does not remain in the facility.
There is no guidance under IFRS on how to account for leasehold improvements, per se. The recommendations made in the following paragraphs is derived from those under US GAAP
Leasehold improvements are often classified as intangibles because the reporting entity has only the (intangible) right to use the property, and does not own the physical property itself once it is
attached to the leased property in a way that it cannot be removed or undone. On the other hand, leasehold improvements are not always perceived of as intangibles because they involve tangible
physical enhancements made to property by or on behalf of the property’s lessee. By law in many jurisdictions, when improvements are made to real property and those improvements are permanently affixed to the property, the title to those improvements automatically transfers to the owner of the property. The rationale behind this is that the improvements, when permanently affixed, are inseparable from the rest of the real estate. For purposes of the following discussion, whether leasehold improvements are depreciated or amortized is a mere semantic point, and does not alter the substance of this guidance. (The term amortization will be used here, however.)
A frequently encountered issue with respect to leasehold improvements relates to determination of the period over which they are to be amortized. Normally, the cost of long-lived assets is charged to expense over the estimated useful lives of the assets. However, the right to use a leasehold improvement expires when the related lease expires, irrespective of whether the improvement has any remaining useful life. Thus, the appropriate useful life for a leasehold improvement is the lesser of the useful life of the improvement or the term of the underlying lease.
Some leases contain a fixed, noncancelable term and additional renewal options. When
considering the term of the lease for the purposes of amortizing leasehold improvements, normally only the initial fixed noncancelable term is included. There are exceptions to this general rule, however. If a renewal option is a bargain renewal option, which means that it is probable at the inception of the lease that it will be exercised and, therefore, the option period should be included in the lease term for purposes of determining the amortizable life of the leasehold improvements. Additionally, under the definition of the lease term there are other situations where it is probable that an option to renew for an additional period would be exercised. These situations include periods for which failure to renew the lease imposes a penalty on the lessee in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Other situations of this kind arise when an otherwise excludable renewal period precedes a provision for a bargain purchase of the leased asset or when, during periods covered by ordinary renewal options, the lessee has guaranteed the lessor’s debt on the leased property.
jurisdictions, when improvements are made to real property and those improvements are permanently affixed to the property, the title to those improvements automatically transfers to the owner of the property. The rationale behind this is that the improvements, when permanently affixed, are inseparable from the rest of the real estate. For purposes of the following discussion, whether leasehold improvements are depreciated or amortized is a mere semantic point, and does not alter the substance of this guidance. (The term amortization will be used here, however.) A frequently encountered issue with respect to leasehold improvements relates to determination of the period over which they are to be amortized. Normally, the cost of long-lived assets is charged to expense over the estimated useful lives of the assets. However, the right to use a leasehold improvement expires when the related lease expires, irrespective of whether the improvement has any remaining useful life. Thus, the appropriate useful life for a leasehold improvement is the lesser of the useful life of the improvement or the term of the underlying lease.
Some leases contain a fixed, noncancelable term and additional renewal options. When
considering the term of the lease for the purposes of amortizing leasehold improvements, normally only the initial fixed noncancelable term is included. There are exceptions to this general rule, however. If a renewal option is a bargain renewal option, which means that it is probable at the inception of the lease that it will be exercised and, therefore, the option period should be included in the lease term for purposes of determining the amortizable life of the leasehold improvements. Additionally, under the definition of the lease term there are other situations where it is probable that an option to renew for an additional period would be exercised. These situations include periods for which failure to renew the lease imposes a penalty on the lessee in such amount that a renewal appears, at the inception of the lease, to be reasonably assured. Other situations of this kind arise when an otherwise excludable renewal period precedes a provision for a bargain purchase of the leased asset or when, during periods covered by ordinary renewal options, the lessee has guaranteed the lessor’s debt on the leased property.
Dear Experts
Entries for Distribution of Net Assets between JV partners
BALANCE SHEET of JV
ASSETS
BANK 100
Equity
SCapital 500
Losses 400
Hemant
It depends on what you mean by “repairement” (since this is not, as far as I know, an English word).
In any event, if what you mean is a “leasehold improvement” (where the leased property is renovated, reconstructed or remodeled to suit the lessee), this would qualify for capitalization per IAS 16.7 regardless of whether the payment was made to the lessor or a third party (say a contractor). It would then be depreciated over the lease term or its own useful life whichever is shorter.
If, on the other hand, what you mean is “repairs and maintenance” day-to-day servicing of the item), these may not, as per paragraph 12, be capitalized at all. Whether they are paid to the lessor or to a third party is, again, not relevant.
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