BLM12025 - Lease accounting:
operating lease accounting: operating lease incentives, UITF 28 and
SIC 15
When negotiating a new or renewed operating lease a lessor
may provide incentives for the lessee to enter into the agreement
such as an up-front cash payment, the reimbursement of costs
associated with a pre-existing lease commitment of the lessee,
relocation costs, leasehold improvements or even a rent free
period.
UITF 28 provides guidance on how to account for incentives
under UK GAAP as follows:
- The lessor should recognise the aggregate
cost of incentives as a reduction of rental income over the lease
term or a shorter period ending on a date from which it is expected
the prevailing market rental will be payable. The allocation should
be on a straight-line basis unless another systematic basis is more
appropriate.
- The lessee should recognise the aggregate
benefit of incentives as a reduction of rental expense over the
shorter of the lease term and a period ending on a date from which
it is expected the prevailing market rental will be payable. The
allocation should be on a straight-line basis unless another
systematic basis is more appropriate.
SIC 15 provides guidance under IFRS as follows:
- The lessor shall recognise the aggregate
cost of the incentives as a reduction to income over the lease term
on a straight line basis, unless another systematic basis is more
appropriate.
- The lessee shall recognise the aggregate
benefit of incentives as a reduction to rental expense over the
lease term, unless another systematic basis is more
appropriate.
Therefore under UK GAAP, typically lease incentives will be
spread over a shorter period compared to IFRS.
