Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
Greetings, everyone. I'm currently serving as a finance manager for a company with multiple restaurants in the UAE. We recently opened a new restaurant within a mall, and as part of our contract with the mall owners, they are providing us with 500,000 AED for the acquisition of fixed assets. However, there's a crucial condition attached to this arrangement: the ownership of these fixed assets will remain with the mall owners for the initial 3 years out of a total of 5 years. After this period, ownership of the assets will be transferred to us. It's important to note that if we decide to close the restaurant before the completion of the first 3 years, the mall owners will retain ownership of the assets. I'm seeking guidance on the appropriate accounting treatment for this transaction in accordance with IFRS. Thank you.
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
Sounds like a landord contribution which is a lease incentive, presumably you have lease for the site?
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
So the mall owner paid for these assets and owns them, at least for now. How is the ownership transfer secured after 3rd year? Also, how long is the lease term assessed under IFRS 16 and used for RoU and lease liability measurement?
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
The total lease term for the store is for 5 years. After 3 years as the the lease contract the ownership of the assets will be transferred to the lessee i.e. us
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
I'd treat it as a lease incentive and recognise it as a separate non-financial intangible asset, representing the right to receive those fixed assets after 3 years. Remember to consider the expected wear and tear when determining the value of this asset.
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
Therefore, if I consider this amount as a lease incentive, I would subtract it from the Right-of-Use Asset (ROUA) and Lease Liability. Subsequently, I would record it as a non-financial intangible asset. What would be the corresponding entry on the credit side?
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
Given that I am acknowledging a non-financial intangible asset, I am required to amortize it over a period of three years, correct? This implies that at the conclusion of three years, the Net Book Value (NBV) of this right will be ZERO. Subsequently, in accordance with IAS 16, I will recognize Property, Plant, and Equipment (PPE) on that date. What should be the assessed value of that PPE?
Re: Accounting Treatment for Mall Owners' Fixed Asset Contribution under IFRS.
When the ownership is transferred to your company, then you should determine useful life and residual value under regular IAS 16 requirements.