BLM52040 - IFRS 16 leases: IFRS 16 Lessees: The spreading rules: Example 3

Retailer Ltd is the lessee under a property lease in respect of shop premises. The lease was entered into on 1 January 2012 for a period of 20 years. During 2017 the retailer stopped using the premises as a shop and recognised an onerous lease provision in respect of its future rental payments.

At 31 December 2018, the onerous lease provision was £750,000.

On adoption of IFRS 16 in its accounts for the year ended 31 December 2019, Retailer Ltd recognised a right of use asset and a lease liability in respect of the property lease. On transition to IFRS 16 Retailer Limited assessed the impairment of the right-of-use asset required under IAS 36 at the date of initial application as £600,000 rather than using the practical expedient to adjust the right-of-use asset by the amount of the onerous lease provision.

But for the existence of the onerous lease provision and impairment, the transitional accounting adjustment in respect of the lease would be a debit of £250,000.

The reversal of the onerous lease provision of £750,000 and recognition of an impairment of £600,000, though, means that that the actual transitional accounting adjustment in respect of the lease is a debit of £100,000. It is this figure which should be used in the spreading calculation (see BLM52015).