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How does a lessee account for a rent free period under FRS 102?

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Published: 01 Jul 2018 Updated: 18 Dec 2020 Update History

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Contents

Technical helpsheet to help members understand how lessees should account for an operating lease with a rent free period under FRS 102 and provides a practical example of the calculations required.

Introduction

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand how lessees should account for an operating lease with a rent free period under FRS 102 and provides a practical example of the calculations required.

Members may also wish to refer to the following related helpsheets:

Requirements

With any lease, it must be determined whether it is a finance lease or operating lease (see the helpsheet Accounting for leases under FRS 102).

If the lease is an operating lease (i.e. it does not transfer substantially all the risks and rewards incidental to ownership to the lessee), the lease payments shall be recognised on a straight line basis over the lease term in accordance with FRS 102 paragraph 20.15, unless an exception applies.

Exceptions to the straight line basis apply where another systematic basis is representative of the time pattern of the user’s benefit; the payments to the lessor are structured to increase in line with expected general inflation (based on published indexes or statistics) to compensate the lessor for their expected inflationary cost increases; or where a COVID-19-related rent concession has been granted (see COVID-19-related rent concessions under FRS 102 and FRS 105).

A rent free period is a lease incentive (as defined in the glossary of FRS 102) and under FRS 102 paragraph 20.15A, it must be spread over the lease term as a reduction to the lease expense.

Example

A lessee enters a new 10 year lease to rent a property. The first six months are rent free, and rent of £7,500 is payable quarterly thereafter.

In line with the above requirements, the lease payments will be recognised on a straight line basis over the lease term and the rent free period will be spread over the lease term as a reduction to the lease expense.

Lease expense

The total lease expense is:

£7,500 per quarter x 38 quarters = £285,000

The annual lease expense is therefore:

£285,000 / 10 years = £28,500 per year

Accounting entries

The accounting entries will therefore be as follows.

Year 1
Dr P&L expense (as above) £28,500
Cr Cash (2 x £7,500) £15,000
Cr Accrual £13,500

Years 2-10
Dr P&L expense (as above) £28,500
Cr Cash (4 x £7,500) £30,000
Dr Accrual   £1,500

If in doubt seek advice

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250, via webchat or e-mail technicalenquiries@icaew.com.

Terms and conditions

© ICAEW 2020  All rights reserved.

ICAEW cannot accept responsibility for any person acting or refraining to act as a result of any material contained in this helpsheet. This helpsheet is designed to alert members to an important issue of general application. It is not intended to be a definitive statement covering all aspects but is a brief comment on a specific point.

ICAEW members have permission to use and reproduce this helpsheet on the following conditions:

  • This permission is strictly limited to ICAEW members only who are using the helpsheet for guidance only.
  • The helpsheet is to be reproduced for personal, non-commercial use only and is not for re-distribution.

For further details members are invited to telephone the Technical Advisory Service T +44 (0)1908 248250. The Technical Advisory Service comprises the technical enquiries, ethics advice and anti-money laundering helplines. For further details visit icaew.com/tas.

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  • Update History
    18 Dec 2020 (10: 44 AM GMT)
    Changelog created, helpsheet converted to new template
    18 Dec 2020 (10: 45 AM GMT)
    Links to other helpsheets added to text, If in doubt seek advice paragraph updated.
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