BLM18005 - IFRS 16 leases example: Background to lease terms

Company A enters into a 10 year lease of a building. Lease payments are £100,000 per annum, all payable at the beginning of each year.

Prior to the commencement of the lease, company A pays a lease premium of £9,998 to the landlord.

It is assumed that the interest rate implicit in the lease is not readily determinable. Company A’s incremental borrowing rate as defined in the standard is 5%.

At the commencement date, company A makes the initial annual lease payment and incurs the initial direct costs.

The terms of the lease contract require Company A to restore the building to a certain condition. At commencement date the estimate of the costs for this is £20,000.