A company got into trouble: the air conditioner broke down in the rented premises. The direct obligation of the tenant is to repair it unless otherwise provided by the lease agreement. How the installation and repair of the air conditioner in the rented premises should be recorded in the accounting?
Repair at the expense of the lessee
The air conditioner, being in lease, in most cases should be maintained in a working condition by the lessee.
In accounting, the expenses of ongoing repair should be included in the cost. Such repairs will not increase the future economic benefits from the use of the object of the fixed assets (FA), therefore, a separate non-current asset should not be created (para. 15 of Accounting Standards 7 “Fixed assets”). Depending on the place of use of the air conditioner, the costs of its repairing should be reflected on the accounts 23 “Production”, 91 “General production costs”, 92 “Administrative expenses”, 93 “Costs of sales”, 94 “Other operating expenses”.
The calculation of the subject to the income tax is based on the data of accounting (para.134.1.1 of the Tax Code of Ukraine, hereinafter - TCU). Therefore, “accounting” costs for the current repair of the air conditioner will affect the amount of the income tax.
After repairing the air conditioner, there is a right to a tax credit on VAT on the basis of the tax invoice, registered in the Unified Register of Tax Invoices (hereinafter - URTI) (para. 198.6 of TCU). However, only if the air conditioner is used in the economic activity of the company, otherwise it will have to calculate the conditional VAT obligation (para. 198.5 of TCU).
Repair at the expense of the lessor
As it was noted, the current repair of the leased property is usually performed by the lessee. But sometimes the duty to carry out ongoing repairs is imposed on the lessor in the contract. The financial burden falls on his/her shoulders, so he/she can be not in a hurry to restore the functional condition of the air conditioner.
In this case, the lessee should send a letter to the lessor that he/she is ready to restore the air conditioner at own expense, and the lessor must compensate for the costs incurred. After receiving consent of the lessor, the lessee is fully entitled to repair the air conditioner.
There are two ways for lessee to compensate the money spent:
- wait until the lessor returns the money;
or
- arrange for the inclusion of incurred expenses in the account of future lease payments.
The cost for the current repair of the air conditioner should be reflected in the account 23. And then such repair should be “sold” to the lessor.
If the cost of the repairs will be credited to the next lease payments, then the debt collection should be reflected in the following: debit of subaccount 685 “Settlements with other creditors” with a sub-account credit 377 “Settlements with other debtors”.
Installing own air conditioner
If the rented premises are not equipped with air conditioning at all, the tenant can install it independently.
If the lessee will have ownership of the air conditioner, he/she should reflect it as a separate object of FA. It should be accounted for on sub-account 109 “Other fixed assets”.
The lessee will have the right to accrue the depreciation using one of the methods provided by Accounting Standards 7. If the company, on the basis of annual activity, receives income exceeding UAH 20 million, it will determine the object of taxation of the income tax, taking into account provisions of Article 138 of the Tax Code of Ukraine.
If the lessor will have the air conditioner, he/she must compensate its cost to the lessee. Such compensation should be recorded as FA sale.
At the same time, it’s important when exactly the ownership transfers. If the ownership of the air conditioner transfers right after it is installed, the lessee will not be entitled to accrue depreciation. If the parties agree on the sale of the air conditioner after the expiry of the lease, the lessee has the right to charge depreciation for the entire period of operation of the air conditioner.
