Lease Transactions in Korea by Peace Corps Officers

The Assistant Director of the Office of Administration and Finance, ACTION, requested an opinion on the proper method of accounting for transactions pertaining to certain unusual leases executed in Korea by officers of the Peace Corps for offices and staff living quarters. The leases are recognized by Book II of the Korean Civil Code. Instead of requiring installment rental payments, as is customary for leases within the United States, the Korean lessors require an initial payment, usually of the order of 50 percent of the assessed valuation of the property. The lessor is required to return the initial payment at the expiration of the lease term. Thus, the lessor has the use of the initial payment for the duration of the lease term, and presumably derives his profit from investment at the local interest rate. From an accounting standpoint, ACTION has not been recording the initial lease payment as an obligation. Instead, it has recorded the disbursement of the initial payment as an account receivable, by virtue of an advance to the lessor. The propriety of this accounting treatment raised some question. The proper fiscal year to which the initial payment should be charged is the fiscal year in which the lease is executed. Furthermore, when the initial payment is returned to the end of the lease term, it should be deposited in the General Fund of the Treasury as miscellaneous receipts.