Leasehold Improvements Under IFRS and IFRS for SMEs

Leasehold improvements, also known as tenant improvements, are modifications made to rental premises in order to tailor the space to the needs of the tenant. These improvements, which can range from installing partitions, painting, flooring, or electrical upgrades, have significant accounting implications. The International Financial Reporting Standards (IFRS) and the IFRS for Small and Medium-sized Entities (SMEs) provide guidance on how these improvements should be accounted for from recognition to subsequent measurement and disclosure. This article outlines these procedures under both standards, highlighting their similarities and differences.

1. Recognition

Under IFRS, specifically IAS 16 (Property, Plant, and Equipment) and IFRS 16 (Leases), leasehold improvements are recognized as assets when it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably. This recognition principle requires that the improvements have a separate identity and expected lifespan, and that they are controlled by the lessee.

IFRS for SMEs

Section 17 of the IFRS for SMEs, which deals with Property, Plant, and Equipment, similarly requires that an asset, such as a leasehold improvement, be recognized when it is probable that the future economic benefits associated with the asset will flow to the entity and the cost can be measured reliably. The criteria are aligned with the full IFRS standards, ensuring that SMEs adopt a consistent approach to asset recognition.

2. Subsequent Measurement

IFRS

After initial recognition, leasehold improvements should be measured according to the IAS 16 model chosen by the entity: either the cost model or the revaluation model. Under the cost model, the asset is carried at its cost less any accumulated depreciation and any accumulated impairment losses. The revaluation model allows an asset to be carried at a revalued amount, which is its fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses.

IFRS for SMEs

For SMEs, subsequent measurement of leasehold improvements follows a simplified model. Under Section 17 of IFRS for SMEs, the cost model is predominantly used, where the asset is measured at cost less accumulated depreciation and impairment losses. The revaluation model is not generally available under IFRS for SMEs, simplifying the accounting process for smaller entities.

3. Depreciation

Both IFRS and IFRS for SMEs

Depreciation of leasehold improvements should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. This typically aligns with the term of the lease, not exceeding the lease term, unless the lessee is reasonably certain to exercise an option to purchase the asset or extend the lease.

4. Disclosure

IFRS

IFRS requires extensive disclosures regarding leasehold improvements, including the measurement bases for the class of property, plant, and equipment; the depreciation methods used; the useful lives or depreciation rates; the gross carrying amount and the accumulated depreciation at the beginning and end of the period; and a reconciliation of the carrying amount at the beginning and end of the period.

IFRS for SMEs

The disclosure requirements under IFRS for SMEs are simplified compared to full IFRS. Entities must disclose the measurement bases used for determining the gross carrying amount; the depreciation methods used; the useful lives or the depreciation rates; the gross carrying amount and the accumulated depreciation at the beginning and end of the period; and a reconciliation of the carrying amount at the beginning and end of the period. The requirements are streamlined to reduce complexity and cost for SMEs.

Conclusion

The accounting for leasehold improvements under both IFRS and IFRS for SMEs involves recognizing the improvements as assets and subsequently measuring, depreciating, and disclosing them in a manner that reflects their use and benefits to the entity. While the principles underpinning the treatment of leasehold improvements are similar across both standards, IFRS for SMEs offers a simplified approach to subsequent measurement and disclosure, acknowledging the unique needs and resource constraints of smaller entities. Understanding these nuances is crucial for practitioners and entities to ensure compliance and effective financial reporting.

Leana van der Merwe CA(SA)

Technical and Standards Executive SAIPA