Saturday, May 31, 2014

How to account for the provision for reinstatement and What it is all about?

It is actually typical for an audit client to initiate rental lease agreement to lease the business office building, warehouse, and so forth, together with the landlord of specific premises for particular period of timed (e.g. 5 years). For operation reason, the client may possibly renovate the lease premises, example is installing a cubicle within the stated lease of business office.
provision for reinstatement
 A landlord could call for the audit client (i.e. the audit tenant) to reinstate the business office building upon moving out in the office  when the lease has expired. Audit client might have to incur specific charges to reinstate the lease premises to its original condition. Therefore, a clause might be stated within the agreement to imply cleary that the audit client is recommended to reinstate the lease premise to its original condition. [note: auditor have to study the agreement in a very cautiour manner to evaluate on the obligations of our audit client].

Within this instance, audit client is recommended to accrue for reinstatement expense. Now the issue is, how you can accrue for it, and How much to accrue for it? Audit client is expected to receive a quote from relevant service provider to estimate the reinstatement expense necessary to reinstate thee premise to its original condition (immediately after factoring within the inflation in the upcoming years till it end with the lease period).

The subsequent accounting entries for provision for reinstatement as follow:

      Debit:    Reinstatement Cost (to become recorded in Fixed Asset)
      Credit:   Provision for reinstatement Cost (to become recorded in Accrual)

The reinstatement cost capitalized as fixed asset should be depreciated more than the lease time period. For that reason, it can be evident that the reinstatement cost is actually expensed off on a straight line basis up until it finish with the lease period.

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