Methods of Recoupment of Short Workings Fixed Method and Floating Method30th March 2021
If the lessor or landlord agrees to compensate the losses which were incurred in the first few years (say, three or four years) the same is known as fixed, i.e., if any short-working falls beyond this period, the same cannot be reimbursed.
When the lessor promises the lessee to compensate the loss (short working) only for a fixed time period. The right is said to be fixed. For example. If lessor promises to compensate the loss only during the first 4 years, the right is said to be fixed and any unrecouped balance of short-working will be transferred to P & L A/c Any short working arises in some future years cannot be recouped.
hen the lessor promises the lessee to compensate the short working of any year in the next two or three years. Then the right is said to be floating. For example, if lessor promises to compensate the (short-working) of any year in coming 2 years. Then short- working of 3rd year can be recouped in 4th and 5th year and short-working of 8th year in 9th and 10th year.
When the actual lessee transfers a part of right of asset acquired by him to another person, it is known as situation of sub-lease. In such a case, actual lessee assumes the double position in the whole scenario. He is lessee for actual owner but landlord for the sub-lessee. So, in sub-lease, actual lessee recovers the royalty from sub-lessee on the rate decided between him and sub-lessee and transfer the amount along with his own payment for Royalty to actual owner as per agreement between him and landlord.
If the lessor or landlord agrees to compensate the loss which were incurred in the first few years, in the next or following or subsequent three or four years, the same is known as floating as the same can be adjusted in any year if short-working arises, i.e., each year’s short-working will have to be adjusted against the excess royalties earned in the subsequent years accordingly.
Students must remember in this respect that the short-workings which are not recovered within the stipulated period should be treated as irrecoverable, and, hence, should be transferred to Profit and Loss Account of the year in which the same is lapsed. The recoupable part of short-working is shown in the asset side of the Balance Sheet. Provision to be made for Short-workings
It has already been stated above that recoupable short-working appears in the assets side of the Balance Sheet as a current asset on the assumption that the same will be recouped in future. But it is uncertain. Sometimes, it may not be possible for the lessee to recoup the amount of short-working due to many factors although he has got the legal right to recoup.
From the standpoint of conservatism a provision should be made for such short-workings against Profit and Loss Account in that particular year when such short-working appears. It is needless to say that provisions for short-working will appear in the liabilities side of the Balance Sheet.
Whereas short-workings (recoupable) will appear in the assets side of the Balance Sheet. Consequently, un-recoupable part of the short-workings will be adjusted against such provision and not against Profit and Loss Account. The balance of provision, if any, should be credited to Profit and Loss Account.
Short-working and Minimum Rent
It has already been explained earlier that when the actual royalty (calculated on the basis of a fixed rate to total quality) is less than the amount of the minimum fixed amount (i.e., Minimum Rent) short-working arises. In short, short-workings arises only when actual royalty is less than the Minimum Rent i.e.,
Short-working = Minimum Rent – Actual Royalty
Minimum Rent = Actual Royalty + Short-working
However, in the case of landlord, the amount of Minimum Rent is equal to Actual Royalty Receivable plus the short-workings, i.e.,
Minimum Rent: Actual Royalty Receivable + Short-working
It must be remembered that the landlord is entitled to get the Minimum Rent or Actual Royalties, whichever is higher, (after adjusting the amount of Short-workings, if any.)
Ground Rent: Sometimes the Lessee is to pay an additional fixed rent in addition to the minimum rent which is known as Ground Rent or Surface Rent.
Thank you much …it is super easy to understand and also very helpful to me👍
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