SOX for Leasing/Rent 2056

  • Hi Everyone,
    Just want to get some opinions regarding SOX compliance in recording monthly rent/lease.

    1. Two months rent free—What is the rules for booking the income per SOX?
    2. Billing next month’s rent at the prior month (ie: We bill Feb’s rent at the end of Jan). What is the accepted principal on booking this?
      Thanks a lot.

  • Hi,
    I think you need to check the recognition of these items under the relevant GAAP that you report in (this may be IFRS or US GAAP).
    Your query relates to accounting principles, which are separate to SOX, which only tries to implement control activities to ensure that items have been recorded correctly and are covered under the relevant financial statement assertions (Completeness, Accuracy, Existence/Occurence, cut-off, rights and obligations, presentation and disclosure, valuation).
    I suggest you check the accounting treatment with your GAAP manuals or with another member of your finance team.

  • Thanks brother EMM,
    you think you can provide me with some useful links for the information? I am very new in this field, and doing a research paper on this. Been searching the web for quite some time now.

  • You’ll jhave to tell me what accounting standards you are operating on before I can help you with any accounting issues or tell you where to get a copy of the standards.
    Is this a project for SOX or for accounting? any detail on what your project title and objective is?
    Your questions relate to accounting. so I will need to know exactly what it is you want to know, the accounting treatment (non-sox) or the controls required around the prevention of fraud and financial misstatement of leases)

  • Hi SL and welcome to the forums 🙂
    EMM has some excellent comments and below are a couple of quick search links which might help research this.
    Please paste to browser and add www (as links outside the forum are not permitted by our site admin rent income
    While I’m more of an IT person, in principle SOX requires the following:
    – Honest and ethical accountability of income, expenses, assets, etc. (e.g., if 2 months of free rent is a true discount to secure a business transaction, it seems likely you can record this)
    – Ensuring GAAP, SOX, and other accounting standards are followed accurately and in accordance with statutory requirements (for example in the insurance industry, we have to follow even stricter guidelines than GAAP, as to what can be expressed as an admitted asset, etc.
    – Controls to ensure no one is cooking the books (even if you follow standards precisely, the work flow should be controlled to prevent anyone from expressing false valuations to stock holders)
    Please select this link for more on what SOX is all about:

  • Thank you for all your kind assistance.
    Brother EMM, my paper have different sections. A group project and I am working on the income/deferred income/income recognition section. It’s like a case study on a fictional company. A Mall developer, leasing shop to retailers. My part is to explain the normal (accepted) treatment in recognising income in this particular company.
    Also to point out the possible pitfall that will coz SOX violation. I know 1 of the SOXs standard is test of ‘Occurance’. So if the company booked income pre-maturally, then it violates the occurance test.

  • Seikolover,
    YOur project has nothing to do with SOX . Your project is for financial accounting only. It iis therefore not applicable to this forum which deals with SOX only.
    It is an accounting project only. Occurence only comes in as a financial statement assertion that is used as an objective applied by external audit in this case.
    As I mentioned earler, how you treat the revenue recognition will depend on what accounting standards the company must use. if it is a US project, i would recommend that you do a search on the internet for SAB 104, where you should find what you need online.
    Another option is to perform a search for revenue recognition and leases.
    Good luck with the project

  • As EMM rightly states this is not a SOX issue at all.
    From an accounting point of view:

    1. Two months rent free—What is the rules for booking the income per SOX?
      What income? There would be no income to book from your rent-free period.
    2. Billing next month’s rent at the prior month (ie: We bill Feb’s rent at the end of Jan). What is the accepted principal on booking this?
      Generally speaking you should book income in the period to which it relates i.e. the Feb rent should be booked in Feb. If you raise the invoice in January you should book the transaction in the normal way but make an adjustment to treat it as accrued income (Dr Revenues (P-and-L), Cr Accrued Income (BS)).
      This assumes that the amounts involved are material, if not nobody will likely care if you process the accrual providide that you record only 12 months income per year.

  • All good points thus far.%0AAgree that this sounds like a pretty straight-forward accounting project. However, if Seikolover’s professor has specifically requested that he describe the potential problems that Mall developer might encounter with SOX compliance, of course he’ll need to address it. That is, if the mall is owned by a public corporation.%0AAn obvious suggestion: describe the controls that need to be in place to ensure legal revenue recognition. This is a serious consideration for American corporations. One recent study (2005) found that in the past three years 55% of companies have changed their revenue recognition policies as a result of SOX. Perhaps you could describe the potential for ineffective controls leading to underreporting or misrepresenting revenue from the stores that the the mall leases. Sorry for being so vague, but I’m sure there are many other examples…

  • I believe that both US GAAP and IFRS would require the rental income to be taken into income ratably over the entire term of the lease, including the rent-free period. This would result in building a non-current asset as you recognized rental income prior to collecting cash rent payments. The non-current asset would then be reduced to zero over the period that rents are collected.
    Agreed that this is not a SOX issue, unless you are looking at controls to ensure that income is recognized in accordance with US GAAP

  • One recent study (2005) found that in the past three years 55% of companies have changed their revenue recognition policies as a result of SOX. %0AThis is a good point, but I will apologise now for being pedantic.%0ASOX did not cause anyone to change their revenue recognition policy as SOX does not contain any revenue recognition requirements. However, work done to comply with SOX may have resulted in companies changing their policies as this caused them to realise that their existing practices were incorrect, not practically controllable or just not in compliance with GAAP. %0AThe SOX angle on revenue recognition would arise where the company documents it’s Order to Cash process - along with any other relevant finacial processes - as part of s404 compliance. %0ASpecific relevant risks would need to be included in that process documentation to look at Completeness, Existence or Occurence, Valuation, Rights and Obligations and Presentation and Disclosure.

  • I would like to point out that what Kymike and Denis have stated with regards to the accounting treatment of revenue from leases is correct and that the cut off point for recognition should be the same in both cases (as recoverable).
    I really think that Seikolover needs to review the briefing he has been given for the project though, so that he/she clearly understands what the project requires.
    I also suspect that if it is a student project, that most of the solutions with regards to the relevant accounting treatment should be available within his/her textbooks…

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