close
Share with your friends

AASB 16 Check: Are outgoings recognised on balance sheet?

AASB 16 Check: Outgoings for lessees

A lease of property often includes payment for the right to use the property plus other amounts such as reimbursement of maintenance, rates and other costs, otherwise known as 'outgoings'. This issue of AASB 16 Check responds to the common questions we are hearing from lessees on how payments for outgoings are treated under AASB 16 Leases.

1000

Also on home.kpmg

AASB 16 Leases: Recognition and measurement infographic

Scenario

Let’s pose a scenario that Company Y enters into a lease of an office building for 5 years. It pays a fixed amount of $20,000 per month for the right to use the building. The amount also includes maintenance and waste disposal services, water usage, and a reimbursement for insurance premiums and property taxes paid by the landlord*. Company Y chooses to capitalise only payments for the right to use the building**.

Question 1: Should the Company include the entire fixed amount as the lease payments?

Interpretive response: No, Company Y allocates the fixed amount to the different types of benefits it receives from the landlord.

The Company has a lease, that is, it receives a right to use the building (lease component). It also receives:

  • maintenance and waste disposal services (non-lease component); and
  • a service for water usage (non-lease component).

The Company does not receive a benefit from the insurance premiums and property taxes. Accordingly, Company Y should split the monthly payments between lease payments (to be included in the lease liability) and an expense for the non-lease component services received.

Question 2: How are lease payments to be included in the lease liability determined?

Interpretive response: Company Y allocates the total payments of $20,000 per month between the benefits it receives (lease and non-lease components) from the landlord.

The allocation between the lease and services is based on their respective standalone selling prices as illustrated below:

Component

Stand-alone prices

Selling price ratio

Allocation of consideration

Building lease

$22,000

88 percent

$17,600¹

Maintenance, waste disposal and water***

$3,000

12 percent

$2,400²

Total

$25,000

 

$20,000

¹ ($25,000 x 88 percent)
² ($25,000 x 12 percent)

The Company includes $17,600 in its lease liability, and $2,400 is recognised as an operating expense in the month that it is incurred.

In technical speak

* This is based on the assumption that the property owner is obligated to pay the property taxes. If the occupier (lessee) has the statutory obligation to pay the property tax, then that tax is accounted for under Interpretation 21 Levies.

** When an arrangement contains lease and service components, a lessee has a choice to either:

  • Combine the lease and service components and account for them together as a lease; or
  • Separately account for the lease and service components.

This choice is made by class of underlying asset.

*** Allocation of the consideration in the contract is on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.


If you would like to discuss the implementation of the new standard for your organisation, please contact us.

©2020 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.

Liability limited by a scheme approved under Professional Standards Legislation.


For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal