IFRS 16 - Leasehold improvements

[mariosphilippou]

Hi All,

As I Understand the leasehold improvements should be treated following the relevant standard and not the IFRS 16 as their value is not included in the RoU asset.
In my case I am following IAS 16 - PPE.

So what I did is to:
DR LI
CR Cash

and then

CR LI accumulated amortization
DR Amortization expense

However, I received some cash back in relation to the leasehold improvements. So my question is: Should I deferred this cash and amortized over the LI useful life? and if yes the amortization of this cash should be go against which account in profit and loss? before the application of the IFRS 16 those amortization was included in the rent expense.

Thanks a lot,
Marios

[Marek Muc]

Well, actually it is more complicated and I need to update the knowledge base

See this document from IASB staff. They kind of admit that the illustrative example 13 is rather unfortunate in this respect. I would say that reimbursement of leasehold improvements will often be treated as a lease incentive and accounted as a reduction of the right-of-use asset.

Can you give us more information on the nature of these improvements? Are they essential to the underlying asset or rather result from the specialised needs of your company? Can they be used by another company that will lease the asset after you?

[mariosphilippou]

Hi thanks for the quick reply

Basically are improvements to bring the space into a working environment, basically an empty space was reconstructed to be an office.

Based on my understanding of IFRS 16 Leasehold improvements will be treated by applying other applicable standards. In this case IAS 16 PPE i believe is the most appropriate one.

So as those costs are NOT included within the RoU and incentive should be treated separately. (the cash back received by the lessor)

My issue is what I am going to do with the reimbursement? As I mention above Probably it should be deferred over the useful life of the LI, and the obvious expense is to go against the LI amortization.

I really do not know. I have searched everywhere and i did not find something on that.

Thanks,
Marios

[Marek Muc]

OK so then it is best to decrease the depreciation expense of leasehold improvements that you recognised as a separate asset (over the useful life). I also think that it would make most sense to decrease the cost of leasehold improvements by the reimbursement received from the lessor, but treating it as a kind of deferred income is also acceptable