Difference between start up cost vs leasehold improvement when opening a new shop

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mehranmichail
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Joined: 14 Apr 2019, 04:54

Difference between start up cost vs leasehold improvement when opening a new shop

Post by mehranmichail »

Hi there,
Was wondering if could get help to get answer to following question.
A clothing brand boutique opens a new shop by leasing it for 10 years. It does some electrical work, some theme design and decoration work. Will this expense come under start up cost of opening a new facility definition which is expenses or it is leasehold improvement which can be capitalised?
Kind regards
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exIFRS
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Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by exIFRS »

On the surface what you describe appear to me to be leasehold improvements. I have always interpreted the "costs of opening a new facility" as the celebration and ceremony associated with a new facility (ribbon cutting ceremony or whatever the local equivalent is eg: https://www.vtcprojects.com/vtc-factory ... -ceremony/).

The key element is always is it a directly attributable cost, and while opening the factory/shop in a fancy manner is not, some theming and painting probably is.

https://ifrscommunity.com/knowledge-bas ... able-costs
mehranmichail
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Joined: 14 Apr 2019, 04:54

Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by mehranmichail »

I am really thankful for reply. About directly attributable cost, is not directly attributable cost related to assets already recognised in books? Now here we have operating lease, exp is charged to P&L over lease term. Kind regards
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exIFRS
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Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by exIFRS »

1) I would say that directly attributable costs relate to items that are being recognised as PPE in accordance with IAS 16, and generally leasehold improvements fall under this category (assuming they meet the recognition criteria).

See reference to: REIMBURSEMENT OF LEASEHOLD IMPROVEMENTS in this section: https://ifrscommunity.com/knowledge-bas ... ement-date. It doesn't directly address your issue, but by implication proves the underlying treatment.

2) I am surprised to hear you talking about operating leases, most of the world has now moved to IFRS 16, finance leases only effectively?
mehranmichail
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Joined: 14 Apr 2019, 04:54

Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by mehranmichail »

Thanks for feedback. Here in UK they follow FRS which is local GAAP. It still has this operating/finance lease types. :)
mehranmichail
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Joined: 14 Apr 2019, 04:54

Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by mehranmichail »

If expense break up is say

£7000 on services for designing and applying theme
£3000 for creative concept
£2000 foe electrical work
£1000 paint walls

M I right to think design work and expense on creative concept are marketing in nature?
Paint and electric. Exp may be capitalised assuming are better in quality and long lasting. Right?
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exIFRS
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Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by exIFRS »

This is where you get to apply your professional judgement. Me I generally lean towards capitalisation, as long as it is not egregious. But you really are starting to run up against a materiality issue, does it really matter in the grand scheme of the overall financial statements?

PS I know nothing about UK GAAP.
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JRSB
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Re: Difference between start up cost vs leasehold improvement when opening a new shop

Post by JRSB »

FRS 102 (UK GAAP) is based on IFRS for SMEs (with amendments felt suitable for the UK market) and for simplicity is only updated once every three years - I am fully expecting the next cycle to bring in leases. I believe US GAAP has made the transition for all reporters already.
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