ANGELITO C. DESCALZO, CPA ANGELITO C. DESCALZO, CPA ICAEW IFRS Certified ICAEW IFRS Certified Leasehold Improvements Leasehold Improvements -- Definition Definition Alterations made to rental premises in order to customize it for the specific needs of a tenant. Leasehold improvements include construction of building, fencing, painting, installing partitions, changing the flooring, putting in customized light fixtures, etc. Leasehold improvements can either be undertaken by landlords (lessors), who may offer to do so to increase the marketability of their rental units, or by the tenants (lessees) themselves. Alterations made to rental premises in order to customize it for the specific needs of a tenant. Leasehold improvements include construction of building, fencing, painting, installing partitions, changing the flooring, putting in customized light fixtures, etc. Leasehold improvements can either be undertaken by landlords (lessors), who may offer to do so to increase the marketability of their rental units, or by the tenants (lessees) themselves. When the lessee makes useful improvement to the leased property, the following rules shall apply if no reimbursements are made by the lessor: 1. The lessor may report income under the: a. Outright method based on fair market value (FMV) of improvements in the year of completion b. Spread-out method book value (BV) of improvements are spread over the remaining term of the lease 1. The lessor may report income under the: a. Outright method based on fair market value (FMV) of improvements in the year of completion b. Spread-out method book value (BV) of improvements are spread over the remaining term of the lease Rules on Leasehold Improvement (continued): 2. Lessee may claim depreciation of the improvements over the remaining term of the lease or life of the improvements, whichever is shorter. 3. If there is a premature termination of lease, the lessor should report income based on the BV upon termination less amount already reported as income. 4. The lessor shall apply cash method on prepayment of rental even if it is using accrual accounting. 2. Lessee may claim depreciation of the improvements over the remaining term of the lease or life of the improvements, whichever is shorter. 3. If there is a premature termination of lease, the lessor should report income based on the BV upon termination less amount already reported as income. 4. The lessor shall apply cash method on prepayment of rental even if it is using accrual accounting. Leasehold Improvements Leasehold Improvements Note: If leased property (land and building) is being used actually, directly and exclusive for educational purpose, the lessee shall be exempt from paying real estate tax. All assessments or reassessments made after the 1 st day of January of any year shall take effect on the 1 st day of January of the succeeding year (Sec. 221, Local Government Code of 1991). Note: If leased property (land and building) is being used actually, directly and exclusive for educational purpose, the lessee shall be exempt from paying real estate tax. All assessments or reassessments made after the 1 st day of January of any year shall take effect on the 1 st day of January of the succeeding year (Sec. 221, Local Government Code of 1991). Illustration Illustration Leasehold Improvement Leasehold Improvement Mr. A leased a land to Mr. B for a period of 20 years starting January 2, 2012 at a monthly rental of P50,000. The Lease contract provides that Mr. B will construct a school house on the lot. The contract also provides that the improvement shall become property of the lessor at the end of the lease. The school house was completed on June 30, 2014 at a cost of 2,000,000. The estimated life of the leasehold improvement is 25 years. Mr. B agreed to pay the real estate tax on the land assessed at P34,567 annually. Mr. B paid Mr. A an equivalent of 2 years rent on January 3, 2012. Mr. A leased a land to Mr. B for a period of 20 years starting January 2, 2012 at a monthly rental of P50,000. The Lease contract provides that Mr. B will construct a school house on the lot. The contract also provides that the improvement shall become property of the lessor at the end of the lease. The school house was completed on June 30, 2014 at a cost of 2,000,000. The estimated life of the leasehold improvement is 25 years. Mr. B agreed to pay the real estate tax on the land assessed at P34,567 annually. Mr. B paid Mr. A an equivalent of 2 years rent on January 3, 2012. Q1 Q1 What is the income to be reported by What is the income to be reported by the lessor in 2012? the lessor in 2012? Cash received (P50,000 x 24) 1,200,000 Tax paid by lessee 34,567 Tax paid by lessee 34,567 Income to be reported in 2012 1,234,567 Q2 Q2 What is the income to be reported by What is the income to be reported by the lessor in 2013? the lessor in 2013? Tax paid by lessee 34,567 Income to be reported in 2013 34,567 Income to be reported in 2013 34,567 Q3 Q3 What is the income to be reported by What is the income to be reported by the lessor in 2014 under the outright the lessor in 2014 under the outright method? method? Rent income (50,000 x 12) 600,000 Leasehold improvement 2,000,000 Leasehold improvement 2,000,000 Tax paid by lessee 34,567 Income to be reported in 2014 under outright method 2,634,567 Q4 Q4 What is the income to be reported by What is the income to be reported by the lessor in 2014 under the spread the lessor in 2014 under the spread--out out method? method? Rent income (P50,000 x 12) 600,000 Tax paid by lessee 34,567 Income on Leasehold improvement: Income on Leasehold improvement: Cost 2,000,000 Less: Accumulated amortization (2,000,000/25 x 17.5) 1,400,000 Book value, end of lease 600,000 Computation: (600,000/17.5) x 6/12 17,143 Income to be reported in 2014 under spread-out method 651,710 Q5 Q5 What is the income to be reported by What is the income to be reported by the lessor in 2015 under the spread the lessor in 2015 under the spread--out out method? method? Rent income (P50,000 x 12) 600,000 Income on Leasehold improvement: Cost 2,000,000 Cost 2,000,000 Less: Accumulated amortization (2,000,000/25 x 17.5) 1,400,000 Book value, end of lease 600,000 Computation: (600,000/17.5) 34,286 Income to be reported in 2015 under spread-out method 634,286 Q6 Q6 Assuming the lease contract was terminated on Assuming the lease contract was terminated on March 31, 2018 due to lessees fault, how much income March 31, 2018 due to lessees fault, how much income should Mr. A report in 2018 under the spread should Mr. A report in 2018 under the spread--out method? out method? Cash received (50,000 x 3) 150,000 Leasehold improvement: Cost 2,000,000 Less: Accumulated depreciation Less: Accumulated depreciation (2,000,000/25 x 3.75) 300,000 Book value upon termination 1,700,000 Less: Amount declared as income 2014 17,143 2015 34,286 2016 34,286 2017 34,286 120,001 1,579,999 Income to be reported in 2018 1,729,999 Q7 Q7 How much deductible expenses can How much deductible expenses can the lessee report in 2014? the lessee report in 2014? Rent expense (P50,000 x 12) Tax 600,000 34,567 Depreciation on LHI 2,000,000/17.5 x 6/12 57,143 Depreciation on LHI 2,000,000/17.5 x 6/12 57,143 Expenses to be reported in 2014 691,710 Q8 Q8 How much deductible expenses can How much deductible expenses can the lessee report in 2015? the lessee report in 2015? Rent expense (P50,000 x 12) 600,000 Depreciation on LHI 2,000,000/17.5 114,286 2,000,000/17.5 114,286 Expenses to be reported in 2015 714,286 Q9 Q9 How much deductible expenses can How much deductible expenses can the lessee report in 2018? the lessee report in 2018? Rent expense (P50,000 x 3) 150,000 Depreciation on LHI 2,000,000/17.5 X 3/12 28,571 2,000,000/17.5 X 3/12 28,571 Expenses to be reported in 2018 178,571 Note: Remaining book value of leasehold improvement shall be treated as other loss by the lessee GROSS INCOME from Manufacturing, Merchandising or Mining business Computation of Gross income: Total sales Pxxx Less: Cost of Goods Sold xx Gross Profit Pxxx Add: Other Income xx Gross Income Pxxx Computation of Gross income: Total sales Pxxx Less: Cost of Goods Sold xx Gross Profit Pxxx Add: Other Income xx Gross Income Pxxx GROSS INCOME from Farming Farm includes livestock, dairy, poultry, fruit and truck farms, plantations, ranches, and all land used for farming operations. Methods of reporting gross income: a. Cash basis no inventory is used to determine profits b. Accrual basis an inventory account is used to determine profits c. Crop basis used when crops take more a year to gather and dispose of from the time of planting. Farm includes livestock, dairy, poultry, fruit and truck farms, plantations, ranches, and all land used for farming operations. Methods of reporting gross income: a. Cash basis no inventory is used to determine profits b. Accrual basis an inventory account is used to determine profits c. Crop basis used when crops take more a year to gather and dispose of from the time of planting.
Manual of Administrative Policies and Procedures SECTION: Facilities Number: 09.03.01 Area: Facilities Use and Oversight SUBJECT: Event Reservation and Rental of University Facilities