How does the acquirer in a business combination account for the acquirer's lease restoration provision?

When one business acquires another as part of a business combination accounted for under IFRS 3 Business Combinations, the acquirer must determine the appropriate accounting for the acquiree’s leases. The acquiree continues to recognise its leases as usual, but the acquirer, in its group financial statements, has to make various adjustments in the group’s consolidated financial statements.

Accounting for the right-of-use (ROU) asset and lease liability at acquisition date

The acquirer in a business combination measures the identifiable assets acquired and identifiable liabilities assumed at their acquisition-date fair values. However, there is an exemption for leased assets of the acquiree.

‘The acquirer shall measure the lease liability at the present value of the remaining lease payments (as defined in IFRS 16) as if the acquired lease were a new lease at the acquisition date. The acquirer shall measure the right-of-use asset at the same amount as the lease liability, adjusted to reflect favourable or unfavourable terms of the lease when compared with market terms.’

IFRS 3, paragraph 28B

Accounting for restoration provisions

Lease restoration obligations are recognised separately from the lease liability as a provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. At the acquisition date, the acquirer recognises the restoration provision at its fair value.

Accounting for the debit side

IFRS 16 requires a lessee to include in the cost of its ROU asset, an estimate of restoration costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located, or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.

However, as noted above, when an acquirer accounts for a lease as part of a business combination, the ROU asset is measured at the same amount as the lease liability.

So, where is the debit side of the restoration provision recognised? Despite IFRS 3, paragraph 28B, can it be included in the cost of the ROU asset recognised by the acquirer, or is it simply recognised as part of goodwill?


Entity B has a lease for its office premises. At the end of the lease, Entity B has an obligation to ‘make good’ the property, i.e. to restore it to its original condition. Entity B therefore recognised a restoration provision upon commencement of the lease and included a corresponding amount in the cost of the ROU asset.

Entity B is subsequently acquired by Entity A in a business combination for $2.5 million. The following information is relevant regarding the identifiable assets and liabilities of Entity B at acquisition date:



Fair value of identifiable assets (excluding ROU assets)


Fair value of identifiable liabilities (excluding lease liabilities and restoration provisions)


Fair value of restoration provision


Present value of remaining lease payments for office premises


At acquisition date, Entity A recognises a lease liability and equivalent ROU asset for $250,000 in its consolidated financial statements (IFRS 3, paragraph 28B). No further adjustment is required to the ROU asset because Entity B’s lease payments were at market rates at commencement of the lease, as well as at the business combination acquisition date.

Because the ROU asset equals the lease liability, Entity A does not make any further adjustments to the ROU asset at acquisition date (IFRS 3, paragraph 28B). That is, the costs associated with the restoration provision cannot be included as part of the cost of the ROU in the consolidated financial statements, and is included as part of goodwill.

Entity A calculates goodwill for its acquisition of Entity B in its consolidated financial statements as follows:







Identifiable assets



ROU assets






Identifiable liabilities



Lease liabilities



Restoration provision






Net assets acquired







Need assistance?

Our website contains information about how BDO can help you with your lease accounting. We have a cloud-based lease management system called ‘BDO Lead’ to help you manage the complexities around implementing IFRS 16 in practice. We also provide outsourced leased management services where we manage lease accounting on your behalf using BDO Lead.

Please contact BDO’s IFRS Advisory team if you require assistance with your lease accounting.

For more on the above, please contact your local BDO representative.



This article has been based on an article that originally appeared at BDO Australia. Read the original article here.