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The determination of the useful life of leasehold improvements may be different under IFRS compared with US GAAP. In limited circumstances, the useful life of leasehold improvements may exceed the lease term under IFRS.
US GAAP
IFRS
In accordance with ASC 842-20-35-12, leasehold improvements are amortized over the shorter of the useful life of those leasehold improvements and the remaining lease term. However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee should amortize the leasehold improvements to the end of their useful life.
IAS 16.56(d) states that the legal or similar limits on the use of the asset, such as the expiry dates of related leases, should be considered in determining the useful life of the asset. Therefore, it would generally be expected that the useful life (that is, the depreciation period) of the leasehold improvements is the same as the lease term under IFRS 16. However, there might be situations when the useful life of a leasehold improvement exceeds the assessed lease term.
The IFRS Interpretations Committee issued an agenda decision in November 2019 that addressed the question of whether the useful life of any related non-removable leasehold improvements is limited to the lease term determined applying IFRS 16. The agenda decision confirmed that if the lease term of the related lease is shorter than the economic life of those leasehold improvements, reporting entities should apply IAS 16.56 and IAS 16.57 to consider whether they expect to use the leasehold improvements beyond that lease term. If not, the useful life of the non-removable leasehold improvements should not be longer than the lease term.
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