Accounting for lease incentives: In order to encourage prospective lessees to enter into non-cancellable operating leases, the lessors sometimes propose lease incentives like upfront cash payments, rent-free periods or contributions towards lessee expenses. Even though incentives look attractive, it is doubtful that they are actually free because the lessor will fix the periodic rental payments in a way to recover the costs of the incentives over the lease period. Therefore, rental payments will be higher than with respect to those leases that do not offer incentives.
IAS 17 (Accounting for Leases) is more or less silent regarding lease incentives and deals only with the accounting for the periodic rental payments made under the terms of the operating lease agreement. Therefore, SIC -15(Standard Interpretations Committee) provide guidance on accounting for lease incentives by both lessors and lessees. This interpretation necessitates that all lease incentives related with an operating lease supposed to be considered as part of the net consideration agreed for the use of the leased asset which is irrespective of the nature or form of the incentive or the timing of the periodic lease payments.
- –> Guidance for the lessors — the aggregate costs of the lease incentives is treated as the reduction in rental income over the lease period on a straight-line basis.
- –> Guidance for the lessees — the aggregate benefit of the lease incentives is treated as the reduction in rental expense over the lease period on a straight-line basis.
Under both the cases of Accounting for lease incentives, another systematic basis may be used if it better represents the diminished leased asset.
Accounting for lease incentives (Tenant incentives) :
Again, Tenant incentives are given either in the form of a rent reduction or as an actual cash payment and are recorded as a deferred credit when received. They are figured into the straight-line rent expense, which is recognized over the life of the lease. Tenant improvement allowances can either be paid directly by the landlord or may be reimbursed by the landlord to the tenant.
