By Ane Ohm on February 8, 2023 at 9:32 AM
Lease incentives: They sound straightforward. It’s just an incentive to sign a lease, right?
Sort of. In this blog, we’ll go over what lease incentives are, the three main reasons they’re important, and why they make lease accounting just a little more complicated.
Let’s hop to it!
What is a Lease Incentive?
A lease incentive is a payment made to a lessee from a lessor.
More formally, according to ASC 842, a lease incentive is:
- A reimbursement or payment made to or on behalf of the lessee.
- Losses incurred by the lessor as a result of assuming a lessee’s pre-existing lease with a 3rd party.
IFRS 16, on the other hand, defines lease incentives as:
Payments or reimbursements made by a lessor to a lessee associated with a lease.
Overall, it should be noted that lease incentives come in many different forms. However, a payment to the lessee for a particular good or a service that the lessee is providing to the lessor is not a lease incentive. Lease incentives cannot be payments made to the lessee for a particular service.
Lease Incentive Examples
A few examples of lease incentives include cash payments made at the date of lease execution, a lessor buying out or taking over the lessee’s previous lease, or any type of leasehold improvement paid by the lessor.
A leasehold improvement is an improvement to the leased property. Leasehold improvements paid for by the lessee are capitalized by the lessee and amortized over either the remaining term of the lease or the useful life of the improvement (whichever is shorter). Any amounts paid by the lessor are considered a lease incentive.
Why are Lease Incentives Important?
- Leasehold Improvements can be Advantageous
Leasehold improvements are the most common of all lease incentives. A leasehold improvement is when a lessor reimburses a lessee for all or part their efforts in improving the property which they are leasing. This can be advantageous for a lessor because they themselves don’t have to make improvements to the property they leased out.
As advantageous as leasehold improvements can be, it’s important to perform the accounting for them the right way, which is why it’s important to pay attention to lease incentives in general.
- They Can Help Encourage a Lessee to Sign a Lease
In order to help persuade a lessee to sign a lease, lessors might add a lease incentive to fill, say, vacant office space that they need to lease out.
- Lease Incentives Can Impact Opening Lease Liability and ROU Asset
Depending on whether or not a lease incentive is payable before or at the commencement of a lease, the opening lease liability and ROU asset can be affected in different ways, increasing the importance of paying attention to lease incentives when performing lease accounting.
Lease Incentives Conclusion
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