accounting for leasing of office cubicle space to clients as per IFRS and contract agreement

[Qasim]

i have an audit client , which is a business centre , it leases out cubicle spaces on the office floor to many of its small business clients.

They have one year contracts with their customers which is binding contract , the rent being 100 per month. so if their customer wants to leave the office , they are liable to pay the full 1200 per year amount. , failure to do so can result in court case against them.

My audit client has collected in advance post dated cheques from their customers for the full contract of one year upon signing by their client. These cheques are banked on their due date on a monthly basis.

UPON SIGNING OF THE CONTRACT with their client , they generate a yearly invoice for their client

and they

dr accounts receivable 1200 (which is the full year rent amount)

cr defferred revenue 1200

then once they cash the cheque

they

dr cash 100

cr account receivable 100

and

cr rental income 100
dr deferred revenue 100


My audit client has a year end of 31 december and my question is about their way of accounting if its correct or not ?

AT THE YEAR END OF 31 DECEMBER , they have receivables of around 86,000 and deffered revenue around 140,000


my main concern was that they have recognized their sale correctly as per IFRS( at the end of the month)

but their huge balances of receivable ? and defered revenue ? they have included the value of their full contract of one year upon signing the contract in their accounts receiavbles, like in fact , their accounts receivable should be nil at year end ? beacuse in reality they collect the cheques in advance , which means they should NOT be having any recevable ( correct me if i am wrong ? )

in the month end of december , they might have a small balance of deffered revenue for rent collected in advance for the month of january ,

and so their huge balances of receiavbles (although it is binding) and of deffered revenue was concerning me ?

[Qasim]

I wanted to ask the client to change their way of accounting, and so upon signing the contract(which is legally binding for one year) , no accounting entry would be done ,

SO once they cash the cheque , the entry would be
dr cash 100
cr defferred revenue 100

and they once their client has utlized their office space at the end of the month , the rental income would be recognized and so
cr rental income
dr deferred revenue


IN THIS WAY , they would be having no accounts receivable at year end , and very little deffered revenue which would mostly just january rent in advance.


Would this above treatment be correct and accurate as per IFRS ?

[Ketan Marwah]

Hi,

Generally, lease income from operating leases is recognized by the lessor on a straight-line basis from the commencement date over the lease term so any difference between cash receipts and rental income would be deferred as you have stated in your journals. Refer the following:

https://ifrscommunity.com/knowledge-bas ... ase-income

[Marek Muc]

... so it appears necessary for your client to change their accounting approach. Though it's fair to say that IFRS 16 doesn't explicitly forbid recognising a lease receivable for the entire lease term (it only specifically addresses the recognition of lease income, as Ketan highlighted)