A tenant should recognize restoration cost as part of the right of use asset while incurring obligation for them. This shall be decided based on the circumstances, that it may start at the commencement date or can be a consequence of having used the asset for a particular period.

The obligation is covered under IAS 37 Provisions, Contingent Liabilities, and Contingent Assets. Regular wear and tear occur during the period of the lease which can increase the tenant’s hand-back obligation but it does not give rise to an asset.

Further, the tenant shall apply provisions of IAS 2 Inventories if the leased asset is used to manufacture inventories in the lease period.


The legal owner of the asset may require the lessee/tenant to reinstate the leased space to its original state when the lease expires and the tenant decided not to renew the lease agreement.

Then, a provision for reinstatement cost/restoration cost needs to be recorded, as it is an existing obligation of the lessee/tenant.

This amount relates to the cost to be incurred to reinstate the lease space back to its original state. Such an amount is estimated with the help of a quotation from a renovator or building contractor.

DateParticularsDebit ($)Credit ($)
 XXXXReinstatement costXXX 
 XXXX         Provision for reinstatement XXX
 (To record reinstatement cost)  

The amount capitalized above relates to the full cost to be incurred when the lease expires. For closing the account following entry shall be

DateParticularsDebit ($)Credit ($)
 XXXXReinstatement Cost- Profit and Loss AccountXXX 
 XXXX       Accumulated depreciation/ Fixed asset- reinstatement cost XXX

The depreciation entry is to record the cost capitalized into P&L on a straight-line basis. The reinstatement or restoration cost has to be expensed off on a straight-line basis until the end of the lease period.

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Impact of increase in lease term

In the initial period, the tenant measures the right of use of the asset and includes appropriate estimates of the cost to dismantle and remove the asset or restore the asset to the prior situation before the contract begins.

The obligation for these costs is recognized and measured in accordance with IAS 37. The changes to the best estimate of the settlement amount may result from changes in the amount or timing of the outflows or changes in discount rates.

A lease modification may result in a change to a tenant’s obligations to restore the underlying asset at the end of the lease.  This may result in additional provisioning of restoration costs and should be provided immediately.