BLM12025 - Lease accounting: operating lease accounting: operating lease incentives

This manual is being updated to reflect FRS 102 (2024 amendments). For guidance on the tax treatment of accounts prepared under IFRS 16 or the revised FRS 102, please refer to pages within the BLM50000 chapter.

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.

FRS 102 provides guidance on how to account for incentives under UK GAAP as follows:

  • The lessor shall recognise the aggregate cost of lease incentives as a reduction to the income recognised over the lease term on a straight-line basis, unless another systematic basis is reprentative of the time pattern over which the lessor’s benefit from the leased asset is diminished.
  • The lessee shall recognise the aggregate benefit of lease incentives as a reduction to the expense recognised over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from use of the leased asset. .