Treatment of dilapidaton provision on renewal

How would you account for dilapidation provision when a lease is renewed ?

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Full dilapidation provision has been accrued to return a leasehold building to it's original condition on lease expiry. 

But if the lease is renewed for 10 years (with 5 year break clause), what would you do with the provision ?

Leave it as is, increasing slighlty over next 5 or 10 years to allow for inflationary increases ?

Credit back some provision to P&L and spread the cost over the entire period of original lease plus the new lease (5 or 10 years) ? 

 

Replies (12)

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By paul.benny
07th Jun 2024 11:06

I'd first of all be looking at the requirements of FRS102 s21.

I'm not entirely convinced that a dilapidation provision is permitted - see in particular para 21.6, which essentially says if you can avoid the spend by your future actions, you shouldn't provide. The fact that you've deferred spend for 5/10 years by renewing the lease is evidence that the cost may be avoidable.

Nevertheless, if you really believe that a provision is appropriate, it should be discounted - see 21.7.

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Replying to paul.benny:
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By chrismc
07th Jun 2024 14:19

Hi Paul, thank for your reply. I appreciate the argument on if a provision should be made, but that's not my question
I should have been clearer, the full cost provision has already been made, the original lease is due to expire, presuming on the basis that a provision is required, how would you account for it when the lease is renewed ? Would you credit the provision back to P&L and start accruing again over the remaining lease term ? keep the full provision ? or something else ?

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By More unearned luck
08th Jun 2024 17:10

"...if you can avoid the spend by your future actions...". Surely the spend on a future dilapidations payment can be avoided by current expenditure on maintaining the property to the standard required by the lease. Any provision is tantamount to an admission that the tenant is in breach of the lease.

A debit to the P&L because money has spent on maintenance is one thing. A debit because the money has not been spent sounds bizarre.

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Replying to More unearned luck:
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By paulwakefield1
08th Jun 2024 17:28

But you would provide in respect of the current condition so no provision if the property is in the same condition as at the inception of the lease. The provision for future expenditure would be for unavoidable costs e.g. reinstatement costs that have to be done on vacating the premises and not for future deterioration.

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By paulwakefield1
07th Jun 2024 13:45

This is a rare occasion when I disagree with my fellow Paul.

On the assumption that the renewed lease requires reinstatement to the condition it was in when the lease originally started, this would (under most leases) be unavoidable and there should be a provision based on the condition of the property at the balance sheet date plus any costs for replacements that have to be done on termination (e.g. carpets).

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Replying to paulwakefield1:
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By chrismc
07th Jun 2024 14:22

Thanks Paul, at the moment I'm working on the basis that a provision is required, but how would you account for the existing full provision if the lease is renewed ?

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By paulwakefield1
07th Jun 2024 14:45

Well it rather depends on the terms of the lease(s) and the condition of the property. Are the terms the same barring the rental? Assuming they are, the provision is presumably unchanged apart from the net discounting/inflation effect.

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By philrob
07th Jun 2024 19:14

What is the *Actual* liability? In the vast majority of cases a lease renewal/extension simply kicks the dilapidations bill 'down the road'. In no way (normally) is that cost avoidable.

In 5 or 10 years you will be looking at the existing bill plus an additional 5 or 10 years of ageing, wear and tear. You need to look at the actual legal documents to see what the liabilities are today and what they will be at break/termination and then provide accordingly.

So, my vote would be keep the existing provision and add to it based on a realistic recognition of likely liabilities.

The roof is probably your biggest risk. Often 'Tin Shed' roofs have a 25-30 year life and start showing damage at 15 to 20 years. If it were new when the lease was originally taken out, there might have been little liability at year 10. Year 15 or 20 though you will likely have to do some repairs/renewals. Scaffolding and working at height is expensive.

If your lease has a 'paint the walls not more than 6 months before you leave' requirement then you will probably already have that in your provisions so don't need to double count.

But at the end of the day it is accounting - what number were you looking for?

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By Ruddles
07th Jun 2024 21:23

What do you mean by “full provision”?

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Replying to Ruddles:
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By chrismc
07th Jun 2024 22:19

The provision is equal to the dilapidations estimate.

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By Ruddles
07th Jun 2024 22:37

Estimated by whom? Is it possible that the continued occupation of the property will lead to further dilapidation?

But the principle is simple - at the end of each period you assess the costs likely to be incurred and make the appropriate provision. If that estimate does not increase over the coming years so be it. There is no need to revisit previous years.

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By kevfromaccounting
21st Jun 2024 13:56

I believe you would calculate the PV of the value (assuming unchanged) for +5 or 10 years whichever is the assumed end point and at a discount rate that you assess as reasonable now (which may not be the same rate used initially) and recognise a credit to the P&L (interest cost) for the difference. You then unwind from now to get to the terminal value in 5/10 years.

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