Leases prepaid for years in advance
Question
How should we account for leases paid in advance for 25 years?
We made a one-off payment for the lease of the land for 25 years at the commencement of the lease, and we will not make any further payments.
At the end of the lease term, we can renegotiate the lease or give up the land.
How to account for similar situation?
Answer
Very interesting situation, but not unusual.
Here, no lease liability is created because the present value of the lease payments not paid at the commencement date is zero (as all is paid).
Thus your entry would be:
-
Debit Right-of-use asset;
-
Credit Cash or bank account.
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Hello Is the lessor needs to consider time value of money for the advance payment received and calculate the present value of the unearned revenue. For example, debit cash 100m and credit unearned revenue 80 and credit adjunct account to the unearned revenue 20. Then the 20m will be amortised to finance income and the 80m will be amortised to profit and loss. Is that correct? Thanks
Hi Silvia, in case of office space rental agreement. The tenant has to pay advance rent which is adjustable with monthly rents as per agreement. However, in lease amortization schedule, instead of showing the advance payment in Year 1 as rental payment. In lease schedule, monthly rental payment less advance adjustment amount has been used. Will it be considered as departure from IFRS-16. Looking forward to your comment. Thank you.