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»Ê¹ÚÌåÓýapp example below relates to a property lease

Trading Ltd enters into a property lease on the 1 January 2019.  It draws up its accounts to the 31 December 2019 and uses IFRS accounting framework and therefore uses IFRS 16 in its accounts.

»Ê¹ÚÌåÓýapp property lease is for 10 years and it is concluded that the lessee will not extend the lease beyond that period.  A lease premium is paid of £10,000.  »Ê¹ÚÌåÓýapp lease liability is calculated as £100,000 with the interest rate implicit in the lease being 5%.  »Ê¹ÚÌåÓýapp actual cash rental per year is £12,950.  »Ê¹ÚÌåÓýapp lessee estimates that at the end of the lease it will need to incur £5,000 returning the property to its original condition. 

»Ê¹ÚÌåÓýapp initial recognition will be a lease liability of £100,000 and a right-of-use asset of £115,000 (ignoring discounting). 

»Ê¹ÚÌåÓýapp right-of-use asset is depreciated on a straight line basis over the life of the lease.  For the period to 31 December 2019 the lessee recognises £11,500 for the depreciation of the right-of-use asset and an interest expense of £5,000. 

»Ê¹ÚÌåÓýapp lease premium is capital on first principles but the lessee is deemed to incur a revenue expense under section 63 CTA 2009 (Guidance on lease premium deductions is at BIM46255).  »Ê¹ÚÌåÓýapp lease premium is split between £1,800 capital expenditure and £8,200 revenue expenditure. 

Based upon the original costs of renovation at the start of the tenancy the lessee estimates that 50% of the costs of restoring the property at the end of the lease will be capital costs.  Guidance on the treatment of dilapidation costs, the costs of restoring a property to its original condition, is given at BIM43250.  »Ê¹ÚÌåÓýapp total capital dilapidation expense is therefore £2,500 over the life of the lease.  

»Ê¹ÚÌåÓýapp relevant profit and loss debits and the tax adjustments are shown in the following table.