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IFRS 16 - service charge element - split or bundle

Does the Service Charge element of a leased property need to be split?

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Hi, 

I am preparing accounts under IFRS - re. IFRS 16, I have a 3 year lease with a fixed annual rental amount, and a fixed annual service charge fee. 

Do I need to separate the service charge fee from the annual rental fee where determined the right of use asset? Or, because without the service charge fee, essentially the company can't use the property, is it not a separate lease component? 

Thanks, 

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By paul.benny
02nd Dec 2021 08:57

The service charge is non-lease component of the contract and should be accounted for separately. However, the standard explicitly permits a 'practical expedient' not to separate such charges (para 15). This has to be applied by class of asset - so you would need to do it for all real estate leases.

As you already have the service charge separated out, I think I would account for it separately to avoid the impact on other leased property now or in future.

Bear in mind that IFRS16 increases debt (the other side of the right of use asset) and increases EBITDA by moving cost from lease payments to depreciation and interest. If either of these measures are sensitive, you might want to take that into account.

For future reference, all IFRS can be downloaded from ifrs.org after free registration.

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