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A lease contract between two Indian companies provides that lease rentals INCREASE BY ₹3 MILLION IF THE LESSEE'S PROFIT AFTER TAX EXCEEDS ₹200 MILLION. Under Ind AS 109, the contingent-rental feature is:
AClosely related — any contingent rental feature is part of the lease's economics
BClosely related — the rental adjustment is fixed at ₹3 million, so there is no derivative
COutside Ind AS 109 entirely because the variable is non-financial
DNot closely related — contingent rentals based on profit (not sales) are not closely related to the host lease and require separation
Answer & Solution
Correct answer: D. Not closely related — contingent rentals based on profit (not sales) are not closely related to the host lease and require separation
Contingent rentals based on SALES are closely related to the host lease. But contingent rentals based on PROFIT/PAT are NOT closely related — profit is a much more diffuse variable, influenced by costs, taxes and accounting policies. The feature must be separated and accounted for as a stand-alone derivative.
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