BLM18005 - IFRS 16 leases example: Background to lease terms
This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.
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.