BLM51010 - IFRS 16 Lessees: Taxation of IFRS 16 Lessees: Particular taxation issues for IFRS 16 lessees

Lease rentals, unless there are exceptional terms to the lease, will be on revenue account. GAAP compliant accounts, whether IFRS 16, FRS 101 or FRS 102, provide the basis for recognising the rental tax deduction as explained in BLM51005. Care though should be taken when reviewing the deduction claimed by an IFRS 16 lessee because at least part of the depreciation charge recognised on the right-of-use lease may be a capital cost. Particular care will be needed when reviewing depreciation of right-of-use leases where it is a property lease.

The initial measurement of a right-of-use asset includes the following:

• The initial measurement of the lease liability. (This amount will represent part of the actual rentals payable)
• Any lease payments made to the lessor before the commencement of the lease less any lease incentives received (This could include, for example, received by the lessee to enter into the lease, a lease incentive)
• Any initial direct costs incurred by the lessee (Lease premiums, any Stamp taxes, and any costs paid to a previous lessee, for example to terminate the lease early).
• Estimated costs that could be incurred by the lessee at the end of the lease required under the lease terms (restoring a property to its original condition, returning the asset to the lessor).

Some of the costs capitalised in the right-of-use asset may well therefore be capital costs which will need to be added back as and when they are taken as a tax deduction. Practically this will mean that part of the depreciation of the right-of-use asset should be added back as and when it is recognised in the profit and loss account. Attempts to delay any add back until the actual costs are paid should be resisted.

An example of adjustments that may arise from taking the right-of-use asset as a proxy for the rentals is given in BLM51015.