What is Make-Good Provision?
Under IFRS 16, Make-Good Provision is any costs that will be incurred restoring the leased asset to a necessary condition.
For example, a lessee leases an office. After the start of the lease, the lessee installs a set of kitchen cabinets as part of the office pantry. According to the lease agreement, the lessee will have to return the office bare-shell. Hence, the cost of removing the kitchen cabinets would be part of the amount of Make-Good Provision.
Is Make-Good Provision a Lease Payment?
No, the Make-Good Provision is not a lease payment. A lease payment is defined as any payment that is a result of using the underlying asset. The instalments of lease payments during the course of the lease term shall be summed and calculated into net present value (NPV) as lease liability.
Under IFRS 16, the accounting treatment of Make-Good Provision is calculated as part of the Right-Of-Use Asset (ROU Asset) and to be added as a part of the ROU asset opening balance. The amount of the Make-Good Provision will need to be calculated in NPV and to be added to the ROU Asset Opening Balance.
The formula is as follows:
ROU Asset Opening Balance = Lease liability NPV Opening Balance + Make-Good Provision NPV
For further reading on how ROU Asset is defined, please see the IFRS 16 Guide