FRS 102 Section 21 · IAS 37 · IFRS 16
Dilapidations provision calculator
A fifteen-year repairing obligation is not a fifteen-year-old cost. Discount it, capitalise it into the right-of-use asset, and unwind the discount so the provision arrives at full cost exactly when the works fall due.
Provision
Recognition journal
Unwinding of discount
The provision is only half the entry
Dilapidations feed the right-of-use asset — keep them attached to the lease
A restoration provision changes the asset it belongs to, and it gets revisited every year end. AuditLease holds it against the lease, flows it into the right-of-use asset automatically, and keeps the evidence for the estimate where the auditor will look for it.
How a dilapidations provision works
Most commercial leases oblige the tenant to hand the property back in a specified state — to make good alterations, redecorate, or reinstate an open-plan floor that was subdivided. That obligation is a provision under FRS 102 Section 21 (IAS 37 under IFRS), and there are two things people routinely get wrong about it.
1. It is discounted
A provision is measured at the present value of the expenditure expected to be required, where discounting is material. On a ten-year lease at 4.25%, a £75,000 terminal obligation is a provision of about £49,000 today — a £26,000 difference. Carrying it undiscounted overstates both the provision and the right-of-use asset from day one.
The discount is then unwound as a finance cost across the term, so the provision grows to the full expected cost precisely when the works fall due. That unwinding charge is separate from the interest on the lease liability, and both hit finance costs.
2. It is capitalised, not expensed
Because the obligation arises from using the leased asset, the discounted amount is added to the cost of the right-of-use asset rather than charged straight to profit or loss. It is then depreciated over the lease term with the rest of the asset. The day-one entry is therefore a debit to the right-of-use asset and a credit to provisions — no P&L effect at all.
When to recognise it
You need a present obligation from a past event, a probable outflow, and a reliable estimate. Where the obligation is contractual and arises from an alteration you have made, recognise it in full when the alteration is made. Where it is a general repairing obligation that accretes with wear, it builds up over the term. The distinction matters most in the first year of a lease.
Evidencing the estimate
The number is a judgement, and it is one auditors test. The strongest support is a schedule of condition agreed at the start of the lease — it fixes the baseline you have to return the property to. Failing that, a surveyor's assessment of the terminal liability, or a comparable quote. Revisit it at each reporting date: a change in estimate adjusts the provision and the right-of-use asset, not the prior year.
Common questions
Can I just expense dilapidations when I pay them?
No. Once there is a present obligation, a probable outflow and a reliable estimate, a provision is required. Waiting until the invoice arrives puts the whole cost in the wrong period — typically the year you are also absorbing the cost of moving.
What discount rate should I use?
A pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the liability. In practice a term-matched government bond yield, sometimes with a small risk adjustment. It is not automatically your lease incremental borrowing rate — that rate carries your own credit risk, which a restoration obligation does not.
Does the provision go into the right-of-use asset on transition too?
Under the practical expedient the right-of-use asset is set equal to the lease liability adjusted for prepaid and accrued lease payments — a dilapidations provision you already carry is not one of those adjustments, and it stays where it is. Provisions recognised for the first time after transition are capitalised into the asset in the normal way.
What if the landlord never enforces it?
Non-enforcement history can be evidence about the amount likely to be required, and it is a legitimate input into the estimate. It does not remove a contractual obligation. Document the basis if you are provisioning below the surveyor's assessment, because that is exactly the judgement an auditor will probe.