IFRS 16 Base building allowance / build to suit (leased property)

[Scotty]

Hi
How is it going?
I came across a situation whereby: company A (tenant) lease retail space from company B (landlord), as part of the agreement the tenant is required to perform capital work (construction) on behalf of the landlord. The landlord will reimburse the tenant for the construction cost in full. Is this an incentive under IFRS 16, as this would be work normally done by the landlord before making the asset available for use?

[Marek Muc]

Hi, this is not a lease incentive in my opinion. I recently added a section on reimbursement of leasehold improvements to the knowledge base. Check it out pls and let me know what your thoughts are

[Scotty]

Thanks again
I think this allowance can be position as a lease incentive.
(1) The Base building allowance ("allowance") was part of the lease negotiation which serves as a further encouragement for the tenant to sign the lease.
(2) Typically, the base building work would be done by the landlord, however in this case the tenant agrees to undertake the work to construct the asset (due to construction specification and government requirements) on the behalf of the landlord. It was agreed that the landlord would reimburse the amount for the construction.
(3) At the end of the lease term, the tenant is not required to restore the premises and the asset is carried on the books of the landlord not the tenant.

Think I may write my position paper around these points to demonstrate the lease incentive.
let me know your thoughts.

[Marek Muc]

Then how would you account for this construction in tenant's books? Show me your debits and credits for 1.expenditure and 2. reimbursement

[Scotty]

Good point! Just looking back at the fact pattern of this transaction, I consider the below options, will make an argument for option 3.
1) Lease Incentive - No
2) Leasehold Improvement - No
3) Flow-through arrangement (Offsetting) - Yes

[Marek Muc]

I don't know any details, but IMO it's unlikely that the tenant is only an agent in this construction work.

Is the tenant a construction company? What are the reasons that the landlord outsourced this work to the tenant? Maybe this construction part should be accounted for as revenue under IFRS 15

[Scotty]

The tenant is a retailer not a construction business.
The landlord wouldnot have the base building done in time for the tenant, hence the tenant agreed to get it done and the landlord reimburse upon completion. In addition, the tenant wants the base building to meet certain regulatory specification. I know under FSAB this could be treated as a sale and leaseback situation. Its a bit grey under IFRS. I cannot fine any real guidance for this situation.

Thanks

[Marek Muc]

Can you give a specific reference to US GAAP where such situations are covered?

[Scotty]

https://www2.deloitte.com/content/dam/D ... andard.pdf
page 752

[Marek Muc]

Thanks. I don't think you have a build-to-suit asset in your case (see ASC 842-40-55-5)

I would treat the construction as leasehold improvement recognised as a fixed asset under IAS 16, net of any reimbursement receivable. It's true that there is no specific guidance in IFRS.

[Scotty]

Thanks!