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When accounting for lease incentives in accordance with IFRS 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 publication aims to resolve these lessee accounting questions.
The Standard and the Basis for Conclusions do not elaborate on this definition. In addition, IFRS 16 does not provide guidance on the various types of arrangements between the lessor and the lessee that may satisfy this definition (with the exception of the Illustrative Example 13 which has subsequently been amended by the IASB).
In our view, even though not clearly stated, we believe the definition could suggest that an analysis similar to the IFRS 15 ‘Revenue from Contracts with Customers’ guidance relating to the consideration payable to customers could be applied. Accordingly, any payments made to or on behalf of a lessee within the context of the lease contract should be considered as an integral part of the net consideration of the lease and therefore be accounted for as an incentive. This is to the extent they are not made for:
- the transfer of distinct goods and services or any other asset from the lessee; or
- the costs incurred by the lessee on lessor’s behalf.
In addition, we believe the former interpretation SIC 15 ‘Operating Leases—Incentives’, which dealt with such type of transactions under IAS 17, is helpful in delimiting the scope.
SIC 15 stated all incentives provided in consideration of the agreement for a new or renewed lease had to be recognised as an integral part of the net consideration agreed for the use of the leased asset, irrespective of the incentive’s nature or form or the timing of payments. We think this is still true under IFRS 16 and therefore similar accounting considerations with respect to the definition and scope would apply.
Forms of lease incentives
In negotiating a new or renewed lease, the lessor may provide incentives that can consist of:
- An up-front cash payment to the lessee.
- The reimbursement or assumption by the lessor of costs of the lessee such as relocation/moving costs.
- The reimbursement of costs associated with a pre-existing lease commitment of the lessee or costs relating to a payment to a former landlord.
- A rent-free period or period where a reduced rent is payable.
This list is not exhaustive and other types of incentives may be offered to the lessee. IFRS 16 requires a lessee to include lease incentives in the measurement of both the right-of-use asset and the lease liability. Therefore all forms of lease incentive should be considered when determining the carrying amount of the lease liability and the right-of-use asset. However, it should be noted some lease incentives may have an impact on the right-of-use asset but not the lease liability if they are paid immediately by the lessor.
Lease incentives, part of Insights into IFRS 16 series, provides further guidance and how to account for the following incentive examples:
- Reimbursement of relocation costs
- Rent free period
- Reimbursement of a penalty
- Rent free period plus reimbursement of legal fees
- Lease incentives that exceed lease liabilities
- Incentive for the inconvenience generated by refurbishment works
- Lease incentive on a low value printer.
We hope you find the information in this article helpful in giving you some detail into aspects of IFRS 16. If you would like to discuss any of the points raised, please don't hesitate to contact us.