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Editorial Board on Accounts and Audit
  • Subsequent renewal of lease and Lease hold improvement

    by Rahul on Thursday, August 08, 2019 at 03:12 PM

    A ltd has into non-cancellable lease for 36 month on 1 July 16. Capitalised lease hold improvement (LI) which are depreciated over lease period. A Ltd renewed lease for 60 Month on 1 July 19 and entire period is non-cancellable. In Aug 2019, Company is finalising financials as at 31 March 19. So which period should be considered for depreciation i.e. original till June 2019 or revised up to 2024? If revised period then which amount should be considered for depreciation over revised lease terms?

    Replied byEditorial Board Friday, August 16, 2019 at 05:43 PM

    As per AS 19, a lessee shall depreciate a leased asset over its useful life. However, if there is no reasonable certainty that the lessee will get the ownership of the asset by the end of lease term, it shall be depreciated over lower of the lease term or its useful life. Here, lease term includes the period for which the lessee has option to renew the lease after expiry of non-cancellable lease period when it is reasonably certain that the lessee will exercise the option. The assessment of reasonable certainty is required to be made at inception of the lease.

    Accordingly, in the present case, if at inception of the lease there was option to renew the lease for a period of 60 months after expiry of non-cancellable lease period of 36 months, and the lessee was reasonably certain that it will exercise the option then for depreciation purpose the revised period upto 2024 should have been considered provided the lease term is less than the useful life of the asset on 01-07-2016.

    Presuming now the company wants to change the useful life of leasehold improvements, it can do so on 31 March 2019 prospectively. The remaining carrying amount as on March 2019 can be amortised using prospective life of leasehold improvement which should be lesser of remaining useful life and remaining lease term. A change in useful life is considered as change in accounting estimates.

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