Lease Rental of Land
Tuesday, May 12, 2009
Does a company can capitalize rental payment against lease of land before the start of commercial production? What is the date of Commercial production? Further, briefly discuss the taxation implications of the said rental payment.
Comment:
Accounting Aspect:
As per para 14 of IAS-17, characteristic of land is that it normally has an indefinite economic life and lessee normally does not receive substantially all of the risks and rewards incidendtal to ownership, in which case its an Operating Lease.
ICAP's technical committee recomended in its accounting TR-21 that date of commencement of commercial production is the date when the plant is ready for the production of intended products in commercially feasible quantities. The cut off date so established is without regard when the plant actually commences commercial production. Where the construction of an asset is completed in parts and each part is capable of being used while construction continues on the other parts, capitalization of costs for each part should cease as it is completed.
Therefore, all expensed paid before the commencement of commercial production would be capitalized including rental payment to the lessor.
Taxation Aspect:
Witholding tax would be deducted under section 153 of the Income tax Ordinance under execution of other contracts provided any exemption certificate is produced by the lessor.
Labels: accounting, Taxation
posted @ 4:00 PM,
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