Treatment of 'Girvi'

[nabeelanwer]

AoA

If an entity pays Rs.10M to use an asset for 6 months and after six months Rs.10M will be returned by party from whom asset was hired, what would be the accounting treatment of this transaction.

Facts
Asset Cost 50M

Year End 31 December 2008

Date of Transaction 01 March 2008

Amount Paid 10M

Use of asset 6 months

Amount Returned By Party 10M

No risk reward transfered to entity

Management has no intention to buy asset at end of 6 months.

Please suggest me appropriate accounting treatment.

Regards,
Nabeel Anwer

[kamranACA]

Dear,

It's not a lease transaction since no return is implicit.

At the end of use term, asset (and not cash or cash equivalent has to be returned) so there appears no rqeuirement of treating 10M as financial liability. Even if treated as financial liability it does not rqeuire discounting for fair value calculation as the period of use is just 6 months.

However, the entity paying 10M may report it as financial asset.

In my view, this payment will appear as security deposit (asset) in one entity's books and security deposit (liability) in others.

There will be no entry for derecognition / recognition of asset on both sides. Accordingly no measurment issue arise as well.

Legal and statutory validity of the transaction is questionable. Although the use of asset can cause flowing of economic benefits to one entity and in return cash deposited can do same thing to the other (if invested properly) but some explicit agreement should be made to define limits, covenants, and conditions along with results of the transaction.

Written agreement (enabling other entity to invest and earn 10M deposit) is also required to avoid invoking of section 226 of companies ordinance 1984.

This is as per limited info you provided.


Regards,

[nabeelanwer]

AoA
There is written agreement between parties and as per terms of contract the transferor shall deposit money in Govt. Securities. Can this amount be recognized at amortized cost in books of transferee ?

Regards,
Nabeel Anwer

[kamranACA]

Dear Nabeel,

Since the tenure is less than a year, the actual amount of deposit (received and invested in GOVT risk free securities) will be treated as amortized cost.

No adjustment will be needed since no costs have been incurred to result in a different yield.

Regards,