Accounting for Dilapidations: FRS102

by Trevor Rushton, Director

When companies are looking at taking new accommodation, the end of the lease is often furthest from their mind. Most commercial leases however contain onerous provisions in respect of the Tenant being liable for items such as repairs and alterations. As a result, the costs of terminating a lease on larger sites can sometimes run into millions of pounds and, even small units, can be significant in relation to the size of the company occupying them. Many Tenants are not aware that the Financial Reporting Standards (FRS) can help with such costs. We therefore asked Ian Laurie, a Director in our Manchester office and a dilapidations expert, to answer some key questions relating to dilapidations and FRS102.

1. What exactly are Leasehold Dilapidations?
Leasehold Dilapidations are the works required at lease end, dependent on the exact lease terms, to return a leasehold property to the state it was at the commencement of the term. This may include reinstatement works, repairs and redecoration, as well as specific works that the lease requires at lease end.

2. Why should a client seek professional advice in respect of dilapidations?
Landlord and Tenant law in the UK is extensive, with the earliest current Landlord and Tenant Act dating to 1730, and the oldest legislation being enacted in 1530! Case law is equally extensive and complex, with, for example, the case of Proudfoot and Hart from 1890 still setting the standard for repair. Whilst many people claim to have an understanding of dilapidations, we often find that knowledge does not extend to key areas of case law, and can leave clients exposed to unnecessary and avoidable costs.

3. The previous standard Financial Reporting Standard 12 covered Leasehold Dilapidations. How does the new standard differ?
We are pleased to report that when FRS102 became effective from 1 January 2015, whilst it changed a number of areas of property accounting, the provisions in respect of Leasehold Dilapidations were largely unchanged. For property leases, whilst assets and liabilities should be recognised on the balance sheet, the lease expense recognised in the profit or loss account is generally comparable with the previous provisions of FRS12. The cost of dilapidations works is recognised as depreciation of leasehold improvements over the remaining term of the lease. The key question therefore relates to estimating what cost will be incurred at the end of the lease.

4. How does the Standard deal with Leasehold Dilapidations?
Whilst Section 20 of the Standard deals with leases in a wider context (covering plant, machinery, etc.), Section 21 covers Provisions and Contingencies and it is under this section that dilapidations may be considered. Generally, such costs would represent a constant expense over the lease term.

Under the Standard, a Tenant’s dilapidation provision is deductible for corporation tax purposes if certain criteria are met:

  • The entity has an obligation at the reporting date as a result of a past event – the entering into a lease.
  • It is probable (i.e. more likely than not) that the entity will be required to transfer economic benefits in settlement – the cost of a dilapidations settlement or the cost of works.
  • The amount of the obligation can be estimated reliably – this could be achieved by a dilapidation liability assessment.

5. And how can Watts help?
Watts has extensive experience in dealing with lease end dilapidations, and regularly prepare FRS102 compliant dilapidations assessments for a variety of corporate clients, enabling them to provide a reliable estimate of their Leasehold Dilapidations costs. As with all accounting matters however it is vital that advice be sought from a qualified accountant before proceeding with any inclusion of costs against Leasehold Dilapidations in your Financial Statements.

In summary, the Standard allows a company to make provision for known dilapidations liability within their Financial Statements, ultimately helping with accurate future financial planning.

Trevor Rushton FRICS FBEng ACIArb
Technical Director

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