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.

This section is applicable to entities applying FRS 102 pre 2024 amendments or FRS 105, and for lessors only under IFRS 16 and FRS 102 (2024 amendments). 

See BLM17000 for lessee accounting under the on-balance sheet model under IFRS 16 and FRS 102 (2024 amendments). 

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 (pre 2024 amendments) 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 representative of the time pattern over which the lessor’s benefit from the leased asset is diminished (FRS102 (pre 2024 amendments) 20.25A). 

  • 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 (FRS102 (pre 2024 amendments) 20.15A).  

The same requirements apply under FRS 105 for lessees and lessors, and under FRS 102 (2024 amendments) and IFRS 16 for lessors only. 

Covid-19 Rent Concessions 

In October 2020 the FRC issued temporary amendments to FRS 102 and FRS 105 in respect of COVID-19-related rent concessions. These amendments were to address concerns about how the relevant requirements of FRS 102 and FRS 105 should be applied to temporary rent concessions granted in response to the COVID-19 pandemic. The amendments required entities to recognise changes in operating lease payments occurring  as a direct consequence of the COVID-19 pandemic, and meet specified conditions, on a systematic basis over the periods that the change in lease payments was intended to compensate. The amendments were extended in June 2021 and expired in June 2022.  

The paragraphs relating to Covid-19 related rent concessions were deleted on publication of the 2024 amendments. 

Please contact an Advisory Accountant with any queries regarding Covid-19 rent concessions.