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BLM52015 | Right-of-use assets: right-of-use asset lessees: the spreading rules: example 1

From HM Revenue & Customs · Business Leasing Manual

This simple example demonstrates the calculation of a spreading adjustment for a lessee holding three individual leases and a portfolio of leases with similar characteristics and which transitions to IFRS 16 on 1 January 2019.

  • Lease 1 has 1,826 days remaining on it at 1 January 2019 and the transitional accounting adjustment required in respect of it is a credit of £10 million.

  • Lease 2 has 730 days remaining on it at 1 January 2019 and the transitional accounting adjustments required in respect of it is a debit of £8 million.

  • Lease 3 has 1,826 days remaining on it at 1 January 2019 and there is no transitional accounting adjustment required in respect of it.

  • The portfolio of leases have 1,461 days remaining on them and the transitional accounting adjustment required in respect of them is a debit of £20 million.

The total of all of the transitional accounting adjustments (treating them all as positive numbers) is £38 million.

Lease 1

  • Step 1 The transitional accounting adjustment required is determined to be a credit of £10,000,000

  • Step 2 The £10,000,000 accounting adjustment is treated as a positive number, is divided by the total of all of the transitional accounting adjustments and multiplied by 100.

10,000,000 / 38,000,000 x 100 = 26.32%.

  • Step 3 The Step 2 percentage is multiplied by the remaining term of the lease as at 1 January 2019.

26.32% x 1,826 = 481.

Lease 2

  • Step 1 The transitional accounting adjustment required is determined to be a debit of £8,000,000.

  • Step 2 The £8,000,000 accounting adjustment is divided by the total of all the transitional accounting adjustments and multiplied by 100.

8,000,000 / 38,000,000 x 100 = 21.05%.

  • Step 3 The Step 2 percentage is multiplied by the remaining term of the lease as at 1 January 2019.

21.05% x 730 = 154.

Lease 3

  • Step 1 No transitional accounting adjustment is required.

  • Step 2 Excluded

  • Step 3 Excluded

Portfolio of leases

  • Step 1 The transitional accounting adjustment required is determined to be a debit of £20,000,000.

  • Step 2 The £20,000,000 accounting adjustment is divided by the total of all the transitional accounting adjustments and multiplied by 100.

20,000,000 / 38,000,000 x 100 = 52.63%.

  • Step 3 The Step 2 percentage is multiplied by the remaining term of the lease as at 1 January 2019.

52.63% x 1,461 = 769.

Once the first three steps have been taken for all of the leases, Steps 4 and 5 can be taken.

  • Step 4 The sum of all of the periods found under Step 3 is 481 + 154 + 769 = 1,404 days.

  • Step 5 The spreading period over which all of the transitional adjustments are treated as arising is 1,404 days, beginning on 1 January 2019 (the first day of the first period of account of the lessee beginning on or after 1 January 2019).

If the lessee makes up annual accounts to 31 December each year, the transitional adjustments which are brought into charge for tax purposes will therefore be:

Year ended 31 December 2019 365/1,404 x £18 million £4,679,487

Year ended 31 December 2020 366/1,404 x £18 million £4,692,307

Year ended 31 December 2021 365/1,404 x £18 million £4,679,487

Year ended 31 December 2022 308/1,404 x £18 million £3,948,719