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. Cash12,000
    Cr. Rent Asset(2,400)
    Cr. Rent Revenue(9,600)

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