Accounting Treatment Of "key Money"

[Prakanong]

I was asked this last night and I do not have a clue - how is "Key Money" treated in the accounts in Thailand

A Pre-paid expense like insurance would be in the UK with the value decresing over time to expiry ie next time its due

Do they treat it as an Asset?

Any accountants out there or someone who knows?

[billaaa777]

First the accounting rule and the tax rule could be entirely different.

Next a Pre-Paid expense is an asset and become an expense as it is utilized. So if you paid key money of 120,000 for a 12 month lease, your first balance sheet would show a pre-paid asset of 120,000 and would be reduced 10,000 a month over the next twelve months as “rent expense.”

As for the Thai tax regulation I have not idea. Good luck.

[Prakanong]

First the accounting rule and the tax rule could be entirely different.

Next a Pre-Paid expense is an asset and become an expense as it is utilized. So if you paid key money of 120,000 for a 12 month lease, your first balance sheet would show a pre-paid asset of 120,000 and would be reduced 10,000 a month over the next twelve months as "rent expense."

As for the Thai tax regulation I have not idea. Good luck.

Cheers - that explains things.

I think the guy I was talking to was calling it an Asset only whereas its both.

[fletchsmile]

I was asked this last night and I do not have a clue - how is "Key Money" treated in the accounts in Thailand

A Pre-paid expense like insurance would be in the UK with the value decresing over time to expiry ie next time its due

Do they treat it as an Asset?

Any accountants out there or someone who knows?

Depends on whether you are expecting (or there's an agreement) to get it back or not. i.e broadly put deposit vs. up front payment.

[Khun Jean]

I would treat it the same as you would treat a car or computer.

You write it off in the period for which it is paid, because when it is finished you would have to 'buy' it again.

The difference with a car or computer is that these costs can be estimated very good. 'Key money' is a whole other beast.

In the short while i lived on Samui i have seen several businesses close down because the key money raise was insane.

Like from 100.000 for a 3 year period to 2.000.000 for a 3 year period.

In more civilised places i've not heard of these insane raises.

[blizzard]

what is key money?

is it one time payment or recurring? and who is it paid to?

[meom]

Seems to me they're talking about the lease, amount of which is paid to whoever they rent the place from (shophouse, bar or whatever).

Don't know about Thailand but in some other places sometimes key money is a one off payment as goodwill which is something different again.

Edited September 17, 2007 by meom

[Prakanong]

I was asked this last night and I do not have a clue - how is "Key Money" treated in the accounts in Thailand

A Pre-paid expense like insurance would be in the UK with the value decresing over time to expiry ie next time its due

Do they treat it as an Asset?

Any accountants out there or someone who knows?

Depends on whether you are expecting (or there's an agreement) to get it back or not. i.e broadly put deposit vs. up front payment.

I have never known any key money paid back in Thailand - the opposite in fact where after the three year's lease is up you pay key money again.

[Prakanong]

I would treat it the same as you would treat a car or computer.

You write it off in the period for which it is paid, because when it is finished you would have to 'buy' it again.

The difference with a car or computer is that these costs can be estimated very good. 'Key money' is a whole other beast.

In the short while i lived on Samui i have seen several businesses close down because the key money raise was insane.

Like from 100.000 for a 3 year period to 2.000.000 for a 3 year period.

In more civilised places i've not heard of these insane raises.

My sisters ex-BF got hit with a very large rise too - not as big as the one you describe but from 300,000 to 1,000,000.

[Prakanong]

what is key money?

is it one time payment or recurring? and who is it paid to?

The key money I have known is to get the lease ie its one time payment but for that lease period. An example would be you lease a shophouse/bar etc on a 3 year lease at a rental figure per month but you pay key money for the lease.

When renewing you have to pay key money again and I have seen it jump considerably if they think your business has been doing well.

[fletchsmile]

I was asked this last night and I do not have a clue - how is "Key Money" treated in the accounts in Thailand

A Pre-paid expense like insurance would be in the UK with the value decresing over time to expiry ie next time its due

Do they treat it as an Asset?

Any accountants out there or someone who knows?

Depends on whether you are expecting (or there's an agreement) to get it back or not. i.e broadly put deposit vs. up front payment.

I have never known any key money paid back in Thailand - the opposite in fact where after the three year's lease is up you pay key money again.

Really depends on your definition of key money. As "key money" isn't Thai vocabulary it could mean many things.

Assuming it's legal...

- Deposit you get back in most places = capitalise it as an asset

- Not getting it back =

1) capitalise as an asset initially and amortise (reduce the asset value and take a small monthly charge/expense to your profit and loss account) over period of lease. i.e eventually it is all expensed, but spread over the period of the lease - correct treatment in many countries, particularly if large.

2) expense it all immediately - some countries or if amounts are small

Some examples below from wikipedia to highlight different examples...

<H1 class=firstHeading>Key money</H1><H3 id=siteSub>From Wikipedia, the free encyclopedia</H3>• Ten things you didn't know about images on Wikipedia •Jump to: navigation, searchThis article needs additional references or sources for verification.

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This article has been tagged since July 2007. http://en.wikipedia.org/wiki/Image:Moneybillscoins3.jpgKey money refers to different concepts depending on location.Key money is used differently in different parts of the world and sometimes means money paid to an existing tenant who assigns a lease to a new tenant where the rent is below market. In other parts of the world it is used synonymously with security deposits.

In the United States and the United Kingdom, it is illegal for landlords to require key money. A cash payment of key money may be required in those parts of North America with strict rent controls, most notably New York City. Because it is paid in cash, it is very difficult to trace and usually impossible to prove in court.

In France it is the norm that a tenant that assigns a lease is paid an amount for a lease that is below market. The Capitalization factor is financial and strategic, depending on cost of money, importance of the site to the taker and the location of the site. The ratio used goes from 0 (poor locations) to 12 (top locations e.g. Champs Elysées). Remaining number of years of the contract has little/no impact unless it falls under the legal provision of “déplafonnement du loyer”, meaning the owner is automatically legally allowed to ask for a new rent irrespective of the rent paid so far :

It is also common in many countries to require 'Key Money' in the form of a security deposit. In the United States, for example, it is common for a landlord to require the equivalent of one or two months rent as a security deposit to offset delinquent rent payments or damage to the property during occupancy. This deposit is held in escrow and is refunded when the tenant moves out, less any repair costs. It is common for landlords to take some or all of this deposit and claim spurious costs for nonexistent repairs.

In Japan, key money as a security deposit can also be accompanied by "reikin" -- literally, "gratitude money" -- which is non-refundable and often can be the same amount as the original deposit, as much as six months or more. This practice is commonly despised by foreigners living in Japan and Japanese alike for its resemblance to extortion: The "gratitude" is mandatory. In recent years, an increasing number of landlords and real estate agencies have begun to offer "reikin"-free rental housing to counter the worsening image of the practice.

In Korea, the key money system (Jeonse, as opposed to monthly rent or Wolse) requires the lessee to make a deposit of about 60%~70% of the housing price. The key money is returned when the lease expires. The key money deposit will not be returned before termination of the lease unless another lessee replaces the outgoing lessee.

http://en.wikipedia.org/wiki/Image:TwoCoins.svg This economics or finance-related article is a stub. You can help Wikipedia by expanding it.Retrieved from "http://en.wikipedia.org/wiki/Key_money"

Edited September 18, 2007 by fletchthai68

[fletchsmile]

I was asked this last night and I do not have a clue - how is "Key Money" treated in the accounts in Thailand

A Pre-paid expense like insurance would be in the UK with the value decresing over time to expiry ie next time its due

Do they treat it as an Asset?

Any accountants out there or someone who knows?

Depends on whether you are expecting (or there's an agreement) to get it back or not. i.e broadly put deposit vs. up front payment.

I have never known any key money paid back in Thailand - the opposite in fact where after the three year's lease is up you pay key money again.

[Gary A]

Key money is what you pay for the privilege of taking over someone else's headaches. If you do happen to be successful, the key money as well as the rent will increase the next lease period.

[torrenova]

Key money is paid most usually on 3year or less leases, which may have extension clauses such as 3+3+3 because, as I understand it, any lease over 3 years ahs to be registered and thus tax paid on the income. To the tenant, key money is effectively advance rent but to the owner, it is cash in a bag which disappears, tax unpaid.

It is also used as descirbed to force someone out of a lease or building. Any serious investment on say a 3+3+3 should have any key money and increases in key money as well as rent included. It would then be prudent to renegotiate before you enter the final 3 years of the lease for another 3+3+3 lease.