AASB 16: Make good provisions, what changes? - KPMG Australia
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AASB 16 Check: Make good provisions, what changes?

AASB 16: Make good provisions, what changes?

It is common for lease contracts to require the lessee to restore or ‘make good’ a leased asset at the end of the lease term. Here we respond to some of the more common questions we are hearing from lessees on make good provisions and AASB 16 Leases.

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AASB 16: Recognition and measurement

Transition scenario

Let’s pose a scenario that prior to the date of initial application of AASB 16, a company entered into an operating lease to use a building for 10 years.

On transition to the new standard, the company has a make good provision recognised on the balance sheet relating to the estimated costs of removing leasehold improvements. The corresponding debit is capitalised into the carrying amount of leasehold improvements, which is amortised over time.

The company elects the modified retrospective method of transition to AASB 16, whereby the right-of-use asset equals the lease liability.


Question 1: Should the carrying amount of the make good provision on the transition to AASB 16 be reclassified and included in the lease liability?

Interpretive response: AASB 16 does not change the recognition criteria for make good costs. The company continues to apply AASB 137 Provisions, Contingent Liabilities and Contingent Assets to account for the make good provision. The make good provision balance continues to be recognised separately, and is not reclassified/included in the lease liability.


Question 2: Should the carrying amount of the asset relating to the make good provision (‘corresponding asset’) be reclassified and included in the right-of-use asset?

Interpretive response: Possibly. It depends on whether the company is of the view that the cost relates to dismantling and removing the leasehold improvement or restoring the leased premises. Accordingly, it may either:

  • continue to include the cost as part of leasehold improvements; or
  • reclassify and include the existing cost balance in the right-of-use asset on transition and add disclosure to explain the change.


Question 3: Following on from Question 2, should the company reinstate previously recognised amortisation expense (of the corresponding asset) into the right-of-use asset balance?

Interpretive response: Amortisation expense already recognised in the profit or loss is not recycled from retained earnings into the right-of-use asset.


Question 4: What are the impacts if on transition the company applies the full retrospective method, or modified retrospective method, where the right-of-use asset is measured as if AASB 16 had always applied?

Interpretive response: The company continues to apply AASB 137 to account for the make good provision. The make good provision balance continues to be recognised separately and is not reclassified/included in the lease liability.

However, the right-of-use asset would be accounted for as if AASB 16 had always applied. Consistent with Question 2, if the make good cost relates to the leased asset, this cost is reclassified and included in the right-of-use asset from the date when the provision is recorded.

Ongoing scenario

Let’s pose a scenario that after implementing AASB 16, the company enters into a new lease to use a warehouse for 10 years. Under the contract, the company is required to repaint the warehouse at the end of the lease term.


Question 5: Should the cost of repainting at the end of the lease term be included in the calculation of the lease liability and right-of-use asset?

Interpretive response: The company applies AASB 137 to account for the make good provision. These amounts continue to be recognised separately on the balance sheet and are not included in the lease liability.

Consistent with Question 2, accounting for the make good cost corresponding debit depends on the nature of the restoration. In this case, it relates to the leased asset, the warehouse, and so it is capitalised to the right-of-use asset.

In technical speak

Post implementation of AASB 16, there will be a lease liability and right-of-use asset recognised on balance sheet for the majority of leases. The lease liability and right-of-use asset are measured as follows [AASB 16: 23-26]:

  • Lease liability = Present value of lease payments + present value of expected payments at end of lease
  • Right-of-use asset = Lease liability + initial direct costs of lessee + prepaid lease payments + estimated costs to restore/dismantle or remove (AASB 137) – lease incentives received.

AASB 16 requires that an estimate of the cost in dismantling and removing the underlying asset, restoring the site on which it is located, or restoring the asset to the condition required by the terms and conditions of the lease is added to the right-of-use asset, unless they are incurred to produce inventories. [AASB 16: 24]

AASB 116 Property, Plant and Equipment requires the cost of an asset to include the estimated costs of dismantling, removing or restoring the site on which it is located. [AASB 116: 16]

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