Dear Friends,
An NGO is operating from an rented premises and some expenditure is incurred on the improvement of the building by the NGO. The NGO treats this expenditure as an asset and reflects the same in the depreciation schedule. A note regarding the same is mentioned at the end of the document. The schedule is signed by the auditor.
Please let me know if such expenditure can be treated as an asset for the NGO.
Thanks and regards,
—
B V Soma Sastry
Dear Friends,
It is interesting to learn about the views of subject matter specialists. What does the law say?
Why can’t laws be framed unambiguously leaving no scope for subjectivity! What the Statutory Auditors accept may not be legally valid.
Udayashankar
Dear Subhashji and Sriraman,
Thanks a lot for the clarifications. This will definitely help and has cleared certain doubts that I had.
Regards,
B V Soma Sastry
Dear Sir
As we are aware that AS is not applicable to NPO s .It is applicable only when it has some business activity.Now it is a matter of self imposed policy for the NPO.Normally we measure the performance of NGO through the Yardstick of expenditure incurred on carrying out of the activity and when the resultant asset/right is has not got the specific ingredients of asset (right of of possession, right of enjoyment, right of alienation) in my opinion we should not have an accounting policy which treats such outgoings as an asset rather the same should partake the character of expenditure
It will be good if I can have nature of the expenses.
Thanks
Regards
Rakesh Goswami
I Head Finance & Operations
No:136, IInd Floor Vishal House,
Jamrudpur, New Delhi 110 048 India
Hi,
No it can’t be treated as asset . the ownership of the building is also not the organisation.
Regards.
Murugan
Dear Soma,
I am also in agreement with comments of Sriraman. Please treat it as Leasohold Improvements. This is a very common practice among commercial entities. You can depreciate the leasehold improvements over the remaining lease period.
Regarding Income Tax aspect, please note while you can claim expenditure incurred on improvements as application at the time of capitalisation itself, the same would not be available again at the time of depreciation.
warm rgds
Asset pertains to the owner; Depreciation of building pertains to the structure built; There is appreciation on land price. Its the owner who can construct in accordance with building byelaws and ask for increase in rent. As rented accommodation one may be able to carryout minor changes within the purview of agreement. Minor changes are for running and maintainence of the building during the period of rent. These may not form part of capital.
Dear Soma,
It is not unusual for the NGOs to refurbish or furnish an office, which are hired on long term lease. The cost of such refurbishment could be substantial and there is no reason why the landlord would agree to pay for such costs. In my view, it is permissible to treat such costs as cost of “leasehold improvement” and amortize this cost over the period of the lease. I have practiced this across various organizations where I have signed off the Financial Statements and it has been accepted by the Statutory Auditors of those organisations. However, care should be taken that only those expenses, such as cost of improving the floor, cost of creating false roof, cost of interior design to improve aesthetic look of the office, etc. should be categorised under this. Items, such as, Airconditioners, movable furniture, etc., should nor form part of this.
Hope this is helpful.
Best regards
Sriraman
Effecting improvements to the premises occupied on rental basis by an NGO must be as per the registered lease agreement. NGO is not the legal owner of the premises. NGO may recover the expenses incurred on improvements as per the understanding / lease agreement with the legal owner of the premises. Depreciation on that account is impermissible.
NGO is not the legal owner and as such they cannot construct on behalf of owner. any increase may increase the rental value and they have to part with more rent also; even if constructed on behalf of owner.