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

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. .