BLM52040 | Right-of-use assets: right-of-use asset lessees: the spreading rules: example 3

Entity Ltd entered into a lease on 1 January 2012 for a period of 20 years. During 2017, Entity Ltd stopped using the asset but under the terms of the lease, they were unable to return the asset to the lessor. Entity Ltd 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, Entity Ltd recognised a right-of-use asset and a lease liability in respect of the lease. On transition to IFRS 16, Entity 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.

Without 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, however, 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).