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Hello,
If an entity owns a property and leased it to employees under an operating lease. Is the property treated as Inv. Property or as owner-occupied?
Thank you in advance.
Regards,
MIn what capacity are the employees leasing the property? Is it some private enterprise that a couple of employees are trying to start up, they need somewhere temporarily to store goods / equipment and the directors have kindly allowed them space currently surplus to requirements?
Or are these employees merely a part of a sham scheme, renting from the company to store goods / equipment of the company but pretending to be independent?
If it’s the former, it could well be argued that it’s an operating lease. It could equally be argued that it’s merely the generation of sundry income by the assiduous use of an under-used company asset. Treatment, I suppose, depends upon the actual facts of the situation and the likelihood of this arrangement continuing into the future – and how far into the future. In addition, materiality comes into the equation.
If it’s the latter, it’s not really a lease of any kind and the whole deal should be dismissed as a sham. The only reason I could see for trying this on is so that the company can revalue the property as an investment property and avoid depreciating it whilst successfully avoiding having to revalue all the other property
I suppose that there is a third possibility – that the property has been leased to the Employees Social Club (or similar). In that situation I would treat it still as an owner-occupied part of Property, Plant and Equipment and treat the income from it (if any) as Sundry Income
OK?
It’s about an entity which owns apartments which it leases to famous people under a contract of employment to promote its fashion clothing.Apartments let at below market rate. Lease terms are six months. Leases terminate when contracts terminate.
How should i account for that in the financial statements of the entity?
Thank you.
These are not employees! (In my opinion!)
How, when and why did the entity acquire the properties? Is the practice likely to continue? It’s not an investment property if the leases are ONLY to these independent contractors. Are any of the apartments leased to people totally independent of the entity.
This looks to me like a straight-forward item of PPE. It also reminds me of a past exam question. If in fact it is a past exam question, what does the answer say?
Yes that’s a past exam question June 2006 Number 4 Prochain. I don’t have the answer unfortunately. So the apartments are items of PPE? Thank you so much for all the clarification. I thought that since these famous people were under a contract of employment, they are therefore considered as employees.
Try this:
“Apartments The apartments are occupied by persons who are contracted to the company and are essentially employees. The lease terminates with the termination of the contract because they are essentially owner occupied. The apartments should be classified as property, plant and equipment. The rent is below market rate but there is no employee benefit cost to the company. The difference between the market rent and the actual rent is an opportunity cost which will not be recognised. To recognise it would involve also the recognition of notional income which is not allowed under IFRS. The cost recognised would be the depreciation of the apartments. Therefore, the property should not be designated as investment property nor the difference between the market and actual rental shown as an employee benefit expense.”
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