IFRS 16 – Lease Negotiations after the commencement of the Lease

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Lasa1
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Joined: 07 Oct 2020, 11:29

IFRS 16 – Lease Negotiations after the commencement of the Lease

Post by Lasa1 »

Hello,
ABC (Lessee) enters in a 15-year lease agreement with DEF (Lessor) on April 2022. The building is brand new.
In order to meet the needs of the Lessee, the Lessor has authorized the Lessee to make improvements on the building.
The Lessee built some of the leasehold improvements at the same time the Lessor was finalizing the works on building. Since the building contractor was the same for both works, the Lessor paid the whole invoice and will recharge the Lessee for his portion, let’s say 100USD.
Some of the costs of the building works that were expected to be borne by the Lessor were finally not done (in agreement with Lessee) or cheaper than originally thought, resulting in lower costs for the Lessor, let’s say by 20USD. It was negotiated that the Lessor will deduct 20USD from the 100 USD to be recharge to the Lessee. This deduction of 20 USD was not known at the commencement of the lease, not included in the Lease agreement and no included in the initial measurement of the right of use asset and lease liability.
Would it be correct that Lessee expense this incentive of 20 USD (no impact on the lease liability and ROU) ?
Thanks
Leo
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Joined: 05 Apr 2020, 22:31

Re: IFRS 16 – Lease Negotiations after the commencement of the Lease

Post by Leo »

By expense you mean record a gain in the P&L ?

I would reduce the leasehold improvements for 20 LC and payables by 20 LC.
Lasa1
Posts: 66
Joined: 07 Oct 2020, 11:29

Re: IFRS 16 – Lease Negotiations after the commencement of the Lease

Post by Lasa1 »

Yes, by expense I meant record a gain in the P&L.
I understand that you suggest to reduce the leasehold improvements for 20 LC because you assume that the improvements is for a Lessor's asset, right?
And so, in the case that the improvement would be for a Lessee's asset you would have suggested to book 20 LC as a lease incentive and so as a reduction of the ROU.
Am I following your rational correctly?
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Marek Muc
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Re: IFRS 16 – Lease Negotiations after the commencement of the Lease

Post by Marek Muc »

I also see no basis for a one-off recognition in P&L
Leo
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Joined: 05 Apr 2020, 22:31

Re: IFRS 16 – Lease Negotiations after the commencement of the Lease

Post by Leo »

@Lasa1 :

No, I considered the leasehold as lessee's asset.

"Some of the costs of the building works that were expected to be borne by the Lessor were finally not done (in agreement with Lessee) or cheaper than originally thought, resulting in lower costs for the Lessor, let’s say by 20USD."

It means that the cost of leasehold improvements should've been 80 LC not 100 LC.

For simplicity, I would reduce the leasehold improvements by debiting payables.

PS : the reason why I don't think it's a lease incentives it's because the work hasn't been done at all, it's not an incentive like a gift or something.
Lasa1
Posts: 66
Joined: 07 Oct 2020, 11:29

Re: IFRS 16 – Lease Negotiations after the commencement of the Lease

Post by Lasa1 »

Thanks!
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