Operating Leases — Incentives
SIC 15
Operating Leases — Incentives
SIC 15
General
In a lease arrangement a lessor can provide the following incentives:
- up-front cash payment to the lessee
- the reimbursement or assumption by the lessor of costs of the lessee (such as relocation costs, leasehold improvements and costs associated with a pre-existing lease commitment of the lessee)
- Free rent for a certain period (i.e. first month free)
- Reduced rent
Accounting for lease incentives in an operating lease
In the lessor’s books
- The lessor recognises the total cost of incentives as a reduction of rental income over the lease term, on a straight-line basis
In the lessee’s books
- The lessee recognizes the total benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis
Example
- Bob leases office space from Tom for 5 years at $12,000 per year; Tom provides the first year rent free
- Rent expense/income per year = (4*12,000)/5 = $9,600
- In the books of the lessee (Bob):
- Year 1:
Dr. Rent Expense 9,600 Cr. Rent Liability (9,600)
- Years 2 – Year 5:
Dr. Rent Expense 9,600 Dr. Rent Liability 2,400 Cr. Cash (12,000)
- In the books of the lessor (Tom):
- Year 1:
Dr. Rent Asset 9,600 Cr. Rent Revenue (9,600)
- Years 2 – Year 5:
Dr. Cash 12,000 Cr. Rent Asset (2,400) Cr. Rent Revenue (9,600)