A Quick Recap on the Definition of Make Good Provision
Under IFRS 16, A Make Good Provision(MGP) is the Clause within the lease agreement which requires the lessee to return the asset to its original state by the end of the lease term. for a detailed explanation, please check the IFRS 16 guide.
Example - How to Calculate Make Good Provision
Here is an example:
Company Y rents an office space and agrees to return the office space in bare-shell condition. The MGP amount is $10,000 to pay at the end of the lease. The discount rate is 7%.
Step 1:
Calculate the Make Good Provision Opening Balance. The Make Good Provision Opening Balance is the net present value(NPV) of the future MGP payment.
Step 2:
Add the MGP Net Present Value to the ROU Opening Balance and ROU will have its own calculation schedule after the MGP NPV is added
Step 3:
Calculate the daily discount rate. The formula is (1+ Discount Rate)^(1/365)-1
Step 4:
Based on the daily discount rate and the MGP closing balance, calculate the daily interest expense
Step 5:
Calculate the MGP daily closing balance by adding the MGP opening with the daily interest expense
Step 6:
By the end of the lease, the MGP amount will add up to the amount initially recognized, which is $10,000
Step 7:
Prepare the following entries by month end during the course of the lease term to recognize the Interest expense on MGP and unwind the MGP account
Step 8:
By the end of the lease term, prepare the following journal entries to recognize the MGP payment as well as the final portion of the interest expense
