Amortised rent free period

PGM

We've just got a new unit at work, for running charitable activities out of, just thought I'd get that in

And the period of the lease is 10 year, with the first year free. Wondered if anyone knows the correct treatment in the accounts?

Toffeemadblue

I have been looking at various scenarios for our future location requirements and rent free elements often enter into the calculations, the advice given to me by our auditors was that you would spread the rent free period over the length of the lease or to the nearest break clause, but i haven't confirmed it

PGM

Toffeemadblue wrote: »

I have been looking at various scenarios for our future location requirements and rent free elements often enter into the calculations, the advice given to me by our auditors was that you would spread the rent free period over the length of the lease or to the nearest break clause, but i haven't confirmed it

I had a quick conversation with our auditors and thats exactly what they said also.

I'm not sure about the accounting treatment of that though. Putting the value of the credit on the balance sheet, charging some rent in the free period and then allocating the credit once rent is being charged.

deanshepherd

Toffeemadblue is correct. The total cost is spread over the term of the lease as if it was a discount rather than a rent free period.

PGM

deanshepherd wrote: »

Toffeemadblue is correct. The total cost is spread over the term of the lease as if it was a discount rather than a rent free period.

Yes, but exactly how would you treat that in the accounts?

deanshepherd

An accrual.

PGM

deanshepherd wrote: »

An accrual.

Ah right, quite simple then, thanks.

Julia

Not sure if I would treat it as an accrual. I would say deferred income but it would still be a liability.

deanshepherd

Deferred income?

It's an expense.

Hasan.Ahmet

"Deferred income?"
"It's an expense."

Absolutely.
For entities exempt from using UITFs or SSAPs or FRSs
the accruals concept apply, hence "An Accrual".


What does this mean?
"Not sure if I would treat it as an accrual. I would say deferred income but it would still be a liability."

[Deleted User]

10 yr rental, 1 yr free.

e.g

£100k for the 10 yrs. 1 yr free.

Cash basis is £11,111 pa for yrs 2 - 10 (100k / 9)

Accounts prepared on accruals basis: £100k / 10 = £10k p/a

Yr 1 - Debit P & L by £10k and credit Accruals by £10k
Yrs 2 to 10 - Debit P & L £10k, Debit Accruals £1,111 and credit bank £11,111

By the end of the the 10 yrs, the £10k Accrual balance will be used up. (9 * 1,111)