(a) Accounting and auditing issues
(1) Amortisation of lease premiums
Accounting issues
Per IAS 16 Property, Plant and Equipment the depreciable amount of an asset should be allocated on a systematic basis over its useful life.
If the premiums are associated with periods of reduced rent then it may be appropriate to charge a greater part of the premium to these periods. The reduced rent charges in the statement of profit or loss and other comprehensive income would then be matched with the increased amortisation charge in those periods.
The depreciable amount of an asset is calculated after deducting its realisable value from its initial cost. If the site is unlikely to be retained for the whole period of the lease then the company will need to consider the realisable value.
Unless the premiums are associated with a period of reduced rent, a straight line basis of amortisation is most likely to be appropriate, matching the lease cost to the period over which it will generate revenue.
If the company decides to sublet the site, impairment reviews under IAS 36 Impairment of Assets may be necessary towards the end of each lease when rents able to be negotiated are likely to be lower.
Auditing issues
Given the company’s continued growth the area will be material.
The terms of each lease are likely to differ, given that they are all in different cities. It may be difficult to assess for each site:

• whether any premium is associated with a period of reduced rent
• whether the site will be held for the whole of the lease term (i.e. whether that site will continue to be profitable/prime), and
• if not, what the realisable value of the lease might be.
  It may be necessary to use the work of a property expert.

(2) Refurbishment of new sites
Accounting issues
Per IAS 16 cost comprises purchase price plus any costs directly attributable to bringing the asset to the condition necessary for it to be capable of operating in the manner intended by management.
Consultants’ costs, labour and material costs etc. would all be likely to meet this definition but rates are non-incremental costs and so should not be capitalised. Service costs (gas and electricity?) might be considered incremental provided they relate to the period of refurbishment but it may be more prudent to write these off.
A depreciation policy needs to be formulated to write off the cost of the refurbishment over its ‘useful life’. In order to establish this, a decision will need to be made as to how long the refurbishment will accrue benefits before more refurbishment (e.g. the refit in point (3)) is needed.
Given that this life may not be as long as that of the leases themselves, it would seem appropriate to categorise these costs separately in non-current assets, i.e. not as part of the short leaseholds.
Auditing issues
Again, this area is likely to remain material given the planned expansion.
Although it should be relatively straightforward to vouch the costs included, it will be difficult to assess the ‘useful life’ of the refurbishments.
However, it does seem likely (especially given the refit described in point (3)) that a facelift will be needed every so many years, making it unlikely that these costs should be amortised over the same period as the leases themselves.

(3) Image survey/refit
Accounting issues
Again, there is the problem of whether a clear future economic benefit (i.e. an asset) arises from these costs and if so for how long.
If the independent survey supports increased revenue because of the refit then the costs could be carried forward over the periods expected to benefit from this image.
If future benefits are not ‘probable’ then the costs should be written off immediately.
Auditing issues
The audit firm will need to consider the materiality of these costs though it seems likely that they will be material this year.
In any case, in the first year of audit, the firm should establish a precedent for such costs for the future.
Even if future benefits are ‘probable’ it will be very difficult to establish the period which may benefit.