A new client of mine granted a number of 150 year leases on investment propetries in the 1980s. The leases do not have break clauses (as far as I can see). The properties are all sub let and the rent payable to my client under the head lease is the higher of a % of rent payable under the sublease, a % of market rent or (in some cases) a minimum amount.
I am intending to account for these leases as operating leases and am struggling with what to disclose in respect of rent receivable < 1year, 2-4 years and > 5 years.
All the subleases have a fixed length (less than 5 years) and known rent but where the head lease include a minimum amount do I really disclose the approx 100 years of this minimum amount that is receivable?
One lease has no minimum amount and simply has the higher of a % of rent payable under the sublease or a % of market rent. If the property is not sublet after the current sublease has ended can I assume that the market rent is zero and therefore the minimum payable after the end of the current sublease is zero?
Many thanks for your help.
Replies (6)
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I presume FRS102
https://www.frc.org.uk/getattachment/69f7d814-c806-4ccc-b451-aba50d6e8de...(March-2018).pdf
I think you ought to read this part as it possibly sounds on point:
___________________________________
20.1 This section applies to leases, except for:
(c) measurement of property held by lessees that is accounted for as investment
property and measurement of investment property provided by lessors under
operating leases (see Section 16 Investment Property);
Interesting question. Presumably you're not comfortable with the way these properties were previously accounted for.
As Mr DJKL points out, these appear to be investment properties and section 16 of FRS102 applies. This means that the properties should be fair valued annually but (unless I have missed something) there is no requirement to disclose future lease income as you're suggesting.
I don't want to talk down - but don't forget your company is the lessor, and don't get distracted by references where the reporting entity is the lessee.
The part of FRS102 I pointed to clearly states that where it is the lease of an investment property the lessor can ignore these banding disclosures as that section of FRS102 does not apply re these.
Edit-and if it does not say this then I have big problems as I am FD of a property investment group, we offer no disclosure regarding the split of leases we have granted broken down into year strata.
Not sure I agree with the conclusions reached here. Para 20.30 of FRS 102 details the lessors disclosure requirements. These apply unless 1A is adopted. So any company granting an operating lease needs to disclose the following:
20.30 A lessor shall disclose the following for operating leases:
(a) the future minimum lease payments under non-cancellable operating leases for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years; and
(iii) later than five years;
(b) total contingent rents recognised as income; and
(c) a general description of the lessor’s significant leasing arrangements, including, for example, information about contingent rent, renewal or purchase options and escalation clauses, and restrictions imposed by lease arrangements.
Given it sounds like some of the arrangements in place are complex I suspect b and c above are going to be quite difficult to put down in words! Also, bear in mind the non-cancellable aspect as this is an area often misinterpreted/misunderstood.