IAS -16 construction of hotel building on leased land
13 September 2009
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Company A Parent company Own land and lease out to a company B a subsidiary. Company A will construct hotel for B. Construction cost will be debited to fixed assets. Company B has entered into an agreement with Company C for hotel operation.
Land leased will be an operating lease for both A and B
Hotel building will be capitalized in company A however will be used by company B for earning revenue
Is this correct.
What if company B has to incur some techincal expense during constrcution and pay to COMPANY C can these be accounted in company A as construction cost.
Hemant
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Hello,
What does Company A get from Company B in exchange for Company B using its building? If nothing, you may get into a problem that this building cannot be considered an asset for Company A (as economic benefits doesn’t flow to the entity).
If Company A gets some kind of consideration, consider this to be a lease and treat it as such (depending on the structure of this consideration you will get either capital or operating lease). Also consider whether this building meets definition of “Investment Property” for Company A – you may have to use fair value measurement.
Speaking about any costs incurred by Company B with respect to this building – treatment certainly depends on particular circumstances, but in general you should just see whether these costs meet the definition of “asset” for Company B – if, for example, Company B can increase the rate of rent it charges to Company C without getting an increase in consideration payable to Company A, these costs will probably be an asset for Company B and should be capitalized on its balance sheet, otherwise these costs should be expensed.
Unless there are some special circumstances you haven’t included into you description (like reimbursement agreement between A and B), I see no way for these costs (incurred by Company B) to be capitalized on Company’s A balance sheet.
Regards,
Denis
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