Accounting for a lease where sum paid by the lessee at the inception of the

lease is repaid by the lessor at the expiry of the lease term.

1.The querist has informed that according to prevailing accounting practice, the properties, land or land with building, taken on lease for a long period are capitalized in the books. In such cases, the lease amount is amortized over the years spreading over the period of lease. The querist has informed that, of late, he has come across certain lease agreements, the salient features of which are distinctly different from the normal lease agreements. The details of such an agreement are as below:

a) The period of lease is defined like in any other lease agreement, say 45 to 99 years or more.

b) The lessee is required to pay a lumpsum amount, as lease amount, to be repaid after the completion of the lease period and on handing over the property.

c) The lessor is required to pay a fixed percentage of amount as interest towards the lease amount received.

d) The lessor is, at the same time, entitled for receiving the rent which is equal or slightly higher than the interest paid by him to the lessee.

e) All the rights and the title to the property rest with the lessee till the expiry of lease like any other leased property.

f) On expiry of the lease period, the lessee is required to hand over the property back to the lessor after receiving the lease amount deposited with the lessor.

2. According to the querist, the above lease contains all the characters of a normal lease and, at the same time, has some additional features. The essential elements of a lease, in the view of the querist, are:

(a) The parties.

(b) The subject matter or immovable property.

(d) The term or period.

(e) The consideration or rent.

3. The querist has further informed that the query is with reference to a nationalized bank.

4. In the context of the above facts, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the amounts paid in lumpsum, as referred in para 1(b) above, on such properties, can be capitalized as lease-hold properties;

(b) If yes, whether depreciation can be charged on such properties;

(c) If the same cannot be capitalized, whether they can be shown separately as leasehold properties with a note, in the balance sheet.

Opinion July 31, 1989

1.The Committee notes that the lumpsum amount paid by the lessee bank at the inception of the lease has to be refunded by the lessor at the expiry of the lease term; at the same time the property is to be returned by the lessee bank to the lessor. The Committee also notes that as per clause V.4.d of the agreement : “As security for the repayment of the deposit received by the lessor, the lessor has created an equitable mortgage by the deposit of title deeds relating to the lessor’s property in favour of the lessee described in the schedule hereto. The lessee shall deliver back the title deeds relating to the said property on repayment of the complete deposit amount.” Thus, the property given by the lessor to the lessee is primarily of the nature of security which is to be used by the lessee in consideration of rent, which in this case, happens to be equal to the interest on deposit. The Committee is, therefore, of the view that the lumpsum amount deposited by the lessee with the lessor is, in substance, of the nature of loan recoverable in cash at the expiry of the lease term. Therefore, the said amount should be disclosed as such under the head ‘Loans and Advances’ in the balance sheet, with proper disclosure of the nature thereof.

2. On the basis of the above, the opinion of the Committee, on the issues raised by the querist in para 4 of the query, is as below:

(a) No. The treatment should be as recommended in para 1 above.

(b) Since the answer to the issue in (a) above is in the negative, the question does not arise.

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