Reimbursement of leasehold improvements

[CPA Kevin Matt]

Dear Members,

On the topic of reimbursement of leasehold improvements, when I refer the knowledge base then it is mentioned there that if the reimbursement is not classified as a lease incentive, it is treated as a reduction of their cost. My question is that should we even be recognizing the asset in the books of the lessee in the first place as for the lack of lessee's control over the leasehold improvement to later reduce it by the reimbursement amount? Shouldn't this simply be treated by recognizing a financial asset against the expected amount to be reimbursed? Thanks.

[CPA Kevin Matt]

I am also linking an article on the topic from GT here where it is mentioned that where the reimbursements relate to leasehold improvements made by the lessee but which are controlled by the lessor and are accounted for in its statement of financial position then the lessor’s payment would not represent a lease
incentive (but instead as a reimbursement to the lessee for a payment made on behalf of the lessor). I interpret this as a reimbursement towards a financial asset and not reduction of cost of an asset. Looking forward to hearing your views on the same:

https://www.grantthornton.ca/globalasse ... ntives.pdf

[Marek Muc]

My question is that should we even be recognizing the asset in the books of the lessee in the first place as for the lack of lessee's control over the leasehold improvement to later reduce it by the reimbursement amount?

It's quite common to recognise leasehold improvements as assets by lessees. For example, this agenda decision discusses the useful life of leasehold improvements from lessee's perspective, implying that they can be recognised as PP&E under IAS 16: https://www.ifrs.org/content/dam/ifrs/s ... ements.pdf

As I see it, leasehold improvements are usually controlled by the lessee. This will be the case when the lessee has control over their specifications and can remove these improvements upon vacating the premises.

[CPA Kevin Matt]

Thanks Marek.