Under IFRS 16:24(d), the initial cost of a right-of-use asset can include an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.
The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period. [IFRS 16:24(d)]
The costs described in IFRS 16:24(d) should be recognised as part of the cost of the right-of-use asset when the lessee incurs an obligation for those costs. The lessee should apply AS 2 Inventories to costs that are incurred during a particular period as a consequence of having used the right-of-use asset to produce inventories during that period. The obligations for such costs accounted for applying IRS 16 or
AS 2 are recognised and measured applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets. [IFRS 16:25]
At initial recognition, the estimated liability for such restoration costs is recognised as a provision under AS 37 Provisions, Contingent Liabilities and Contingent Assets if an obligating event has already occurred. It is not included as part of the lease liability.
How to Enter in Cradle a Make Good Provision in Crale
Navigate to specific agreement and to the Initial Recognition tab and to the section Right of Use Asset:
You are then required to input:
The future value of the provision - this is an estimate you must decide on
The discount rate: The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. This is a judgement that the user will need to determine.
Cradle will then handle all the required accounting as described above.
Journal Entries
The journal entries of a make-good provision are as follows:
Dr ROU Asset
Cr Make good provision
Initial Recognition of the lease
Dr Make good provision expense
Cr Make good provision
Accrete the make good provision to the future value
Dr Make good provision
Cr Make good provision suspense account
Derecognition of the make good provision