Due to the pandemic, many companies have moved their employees to remote work mode. However, there are still businesses that are forced to rent premises to house their offices or production facilities on an operating lease basis. Let’s recall the important nuances of such lease relations.
Legal aspects of the lease relations are set in Chapter 58 of the Civil Code of Ukraine (hereinafter – the Civil Code).
First, the essence of accounting for operating leases is that the leased object after the transfer to the lessee remains the property of the lessor and continues to be accounted for on the latter’s balance sheet. That is, the right to depreciate this object remains with the lessor. In turn, the lessee accounts for the leased property on the off-balance sheet account 01 “Leased non-current assets” at the cost specified in the lease agreement. And in case of its return writes it off from this account.
Second, a feature of the lease agreement is the rent for the use of the leased object. Usually, its size is set by the lease agreement, and if the lease is state property, the rent is calculated according to the method approved by Order of the Cabinet of Ministers No. 786 of October 4, 1995. At the choice of the parties the rent may be paid in cash or in kind depending on the terms of the agreement. In the lessee's accounting, the amount of accrued rent is recognized as an expense, and in the lessor's accounting, it is recognized as income.
Third, the civil law requires the lessee to return the leased property to the lessor in the condition in which it was received or in the condition specified in the contract after the expiration of the term of the operating lease. That is, if during the use of the leased property in business activities there were damages or breakdowns, it is a “pain in the lessee’s neck”, not its owner (lessor). But is it always the lessee's responsibility to make repairs when renting? No, and this is confirmed by Art. 776 of the Civil Code. It states that the current repair of the leased property must be carried out by the lessee at own expense, and capital – by the lessor, unless otherwise provided by contract. But to improve the leased property, the lessee can only with the consent of the lessor (Art. 778 of the Civil Code). In this case, the lessee has the right to reimbursement of the cost incurred or offset its value against the rent.
The improvement of the object of operating lease is considered to be its modernization, modification, completion, equipment, reconstruction, which leads to an increase in future economic benefits that were originally expected from its use.
It is also important to remember that according to Art. 284 of the Commercial Code of Ukraine, the procedure for restoration of the leased property is an essential condition of the lease agreement.
Given the above, the lessee's right to make repairs (both current and capital) and improvements should be provided for in the lease agreement, as this is crucial for cost accounting, as well as the right to a tax credit for value added tax.
