Accounting Alert

This Accounting Alert is issued to provide guidance on lease incentives.

Overview

Granting lease incentives is a common way to encourage a new lessee to sign up to a new lease contract and fill vacant premises. Lease incentives may take various forms depending on the negotiation between the lessee and the lessor. When accounting for lease incentives in accordance with PFRS 16, Leases, from a lessee perspective, questions may arise in how to identify a lease incentive and when the accounting treatment changes depending on how the lease incentive is granted. This Alert aims to resolve these lessee accounting questions.

Form of Lease Incentives

In negotiating a new or renewed lease, the lessor may provide incentives that may consist but not limited to the following:

• an upfront cash payment to the lessee
• reimbursement of assumption by the lessor of costs of the lessee such as relocation/moving costs
• reimbursement of costs associated with a pre-existing lease commitment of the lessee or costs relating to a payment to a former landlord
• rent-free period or period where a reduced rent is payable

Leasehold Improvements Incentives

The reimbursement by the lessor of the cost of the leasehold improvements that are controlled by the lessee and are accounting for as its property, plant, and equipment would constitute a lease incentive and should be treated accordingly. Conversely, where the reimbursements relate to leasehold improvements made by the lessee but which are controlled by the lessor and are accounted for in its statement of financial position, then the lessor's payment would not represent a lease incentive (but instead a reimbursement to the lessee for a payment made on behalf of the lessor).

In assessing whether the reimbursement of leasehold improvements is the reimbursement of lessee’s assets and therefore they should be a lease incentive, the lessee should consider whether: 

• it is exposed to any overruns related to the construction of leasehold improvements;
• it is allowed to remove/replace the leasehold improvements without authorization of the lessor; and
• the leasehold improvements are only useful for the lessee.

Judgment will often be required for this assessment.

Incentives on Low-value Assets

A lease incentive related to a lease for which the lessee has elected to apply the low-value asset exemption should be accounted for in profit or loss, recognized on the same straight-line basis as the lease payments. This will result in a net rental expense of lease payments less lease incentives received.

The accounting alert also discusses detailed examples of lease incentives and the appropriate accounting treatment, contingent lease incentives, lease incentives that exceed lease liabilities, and incentives agreed after commencement of the lease.

See attached Accounting Alert for further details.