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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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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 (for those entities not adopting FRS102) 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.

For those UK GAAP entities adopting FRS102, lease incentives are covered by Section 20 paragraph 15A. This says that

“A lessee shall recognise the aggregate benefit of lease incentives as a reduction to the expense recognised in accordance with paragraph 20.15 [the lease payments expense] 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 the use of the leased asset. Any costs incurred by the lessee (for example costs for termination of a pre-existing lease, relocation or leasehold improvements) shall be accounted for in accordance with the applicable section of this FRS”.

SIC 15 provides guidance under IFRS, which also applies to FRS101, 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 SSAP21, typically lease incentives will be spread over a shorter period compared to IFRS and FRS101.

Lease incentives will be treated similarly under both IFRS (and FRS101) and FRS102.