Build-to-suit leases: why the rate at signing measures nothing, and where make-good splits ASC 842 from IFRS 16

The question this page answers

A build-to-suit lease is signed long before anything can be measured. The building does not exist yet. The lessee has a binding contract, a forecast handover date that will probably move, and a discount rate on the day it signed that will not be the rate it uses. Three questions follow, and systems tend to get each of them wrong in a way that still balances.

What do you record between signing and commencement? Nothing in the ledger. Something in the notes, and a population you have to be able to prove is complete.

Which rate measures the lease? The rate in force at commencement. The signing rate is evidence, not an input.

When does the make-good obligation arise, and what is it? When the fit-out that creates it is installed, which here is six months after commencement. It is not part of the lease liability, and the two frameworks measure and present it differently.

Fact pattern

The developer funds the construction and bears its risk, and the lessee has no right to the partly built asset. The lessee therefore does not control the building while it is being built, so this is an ordinary lease that has not yet commenced, not a build-to-suit the lessee is deemed to own (ASC 842-40-55-5). That conclusion is a judgment, and it is recorded before commencement, not assumed.

Signing to installation, and what the ledger sees

From October to December the lease is binding and the trial balance is silent. That is correct (ASC 842-20-25-1 / IFRS 16.22 recognise at commencement), and it is also the problem: the one stretch of a build-to-suit's life that disclosure requires you to describe is the stretch your ledger cannot prove anything about.

Before commencement: the roll-forward the ledger cannot produce

The fulfilment centre was not signed alone. Two other build-to-suit facilities were signed the same day: a cross-dock (60 months at $80,000) and a regional distribution centre (84 months at $120,000). The cross-dock's site acquisition failed and it was cancelled by mutual release in November. The distribution centre is still under construction at year end.

None of that touches the general ledger, so the general ledger cannot prove the population is complete. The subledger has to, from its own register.

Two things in that table are deliberate. The fulfilment centre's slip from November to January is not a movement: the lease is in the population either way, and only its expected date changes. And the cross-dock's cancellation lands in November, not October, because it was agreed after October's books closed. A roll-forward that restates a closed month is not a control.

What the note says at 31 December 2026

Two leases signed and not yet commenced, $40,080,000 of undiscounted payments: the fulfilment centre, expected January 2027, and the distribution centre, expected September 2027. That is the disclosure ASC 842-20-50-3(b) and IFRS 16.59(b)(iv) ask for. The figure is easy to state. Proving it is complete is the hard part, and the roll-forward above is the proof.

Commencement: the rate that measures the lease

On 1 January 2027 the lessee classifies the lease and measures it, at the incremental borrowing rate in force on that date (ASC 842-20-30-1 and 30-2 / IFRS 16.26). Rates rose between signing and handover. The 5.00% the treasury team quoted in October is on file as evidence of the negotiation. It measures nothing.

Using the signing rate overstates the asset and the liability alike by $1,286,834.95, carried for ten years. The allowance reduces the ROU asset under both standards because it reimburses fit-out the lessee owns. It is a lease incentive, not a payment for the landlord's building.

The make-good: one clause, two balance sheets

The lessee must reinstate the building at the end of the lease: fill the slab anchor holes, close the roof and wall penetrations, and restore the building services the fit-out altered. That obligation does not exist on 1 January. It arises when the fit-out is installed on 1 July 2027 (IAS 37.19 / ASC 410-20-25-4). Nothing is recognised for it in months 1 to 6, and IFRS 16.25 allows the cost into the right-of-use asset when it is incurred, even after commencement.

At installation the two frameworks diverge on the rate, the amount, where the cost sits and which line of the income statement the unwinding hits.

Same $1,200,000, same 114 months to run. $50,192.02 apart on day one, because the US GAAP rate is adjusted for the lessee's own credit standing and the IAS 37 rate used here is not.

Accretion is not interest on the lease liability and it is not lease cost. On an ASC 842 operating lease that matters twice over: the single straight-line lease cost stays at $237,500.00 a month, and the make-good charges sit beside it on their own lines.

The journal entries

These are the entries the subledger posts. Commencement is the same in every book: one ROU asset, one liability, the allowance netted against the asset. (In the ASC 842 operating book the allowance sits in its own ROU component, GL 1730, and unwinds at $12,500.00 a month.)

Installation is where the books part company. The entries below are July 2027's make-good lines only. The month's ordinary lease entries are identical in both books.

What the lease costs, and why the totals agree

Each line is rounded to the cent on its own; the IFRS 16 total is the unrounded sum, which is why that column is one cent short of its rounded parts. Over the full ten years every book lands on the same figure, and that figure is just the cash.

The rate choices, the classification and the framework change when the cost lands and which line it lands on. None of them changes the total by a cent.

Proof

Every figure on this page comes from the subledger and the workbooks it emits, and was recomputed independently from the contract terms. These are the checks, not commentary about them.

Three things to check before you apply this

Settle control during construction first. Everything here depends on the lessee not controlling the building while it is built. If any of the ASC 842-40-55-5 indicators is met (the lessee funds construction, owns the land, can take the partly built asset, and so on), the lessee is the accounting owner during construction and the commencement-date story on this page does not apply. Record that assessment, and who made it, before commencement.

Make sure your system cannot pick up the signing rate. Many lease systems take the discount rate when the record is created, and for a build-to-suit the record is created at signing. The result foots, ties and is wrong. Here it is wrong by $1,286,834.95.

Date the make-good to its obligating event, not to commencement. When the obligation comes from fit-out, it arises at installation, at the rates in force then. Dating it to commencement uses the wrong rates and charges six months of depreciation and accretion on an obligation that did not yet exist. Later revisions to the estimate diverge again: IAS 37 / IFRIC 1 remeasures the whole provision at the current rate, while ASC 410-20 adds upward revisions as new layers at the current rate and reverses downward ones at the rates of the layers they came from.

Request the worked example

Three workbooks, one for each basis: IFRS 16, ASC 842 finance and ASC 842 operating. Each measures the fulfilment centre from commencement onward.

The pre-commencement roll-forward and note come from the subledger's register rather than the workbooks. I can walk you through how they are produced.

The workbook is sent by email rather than downloaded, so tell me briefly what you are working on - how many leases you have signed but not commenced, and whether any carry a make-good. It usually means I can send something closer to your facts than the generic file. Write to bruceconwaycpa@aileasecontrollers.com.

This worked example uses an illustrative fact pattern prepared by Fractional AI Lease Controllers, Inc. It is published for technical reference and is not accounting advice. Applying it to your own facts depends on your assessment of control during construction, your discount-rate process and your existing policy elections.