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Accounting treatment for lease incentives under FRS 101

Rama Nair's Profile

As per SIC 15, lease incentives should be spread over period of lease and not first break clause. I have an instance whereby, the lease incentives were spread over the period of the lease in respect of a lease covering 3 floors. The lease has a break clause and now the intent is to serve notice at break date for one floor. Should the lease incentives be reclaculated and adjusted prospectively or an adjustment be made immediately in the accounts? I do not believe it is necessary to do a retrospective adjustment. Would appreciate views on the correct accounting treatment.


Kelvin Smith
Title: Vice President
Company: Financial Computer Systems Inc.
(Vice President, Financial Computer Systems Inc.) |

Definitely there should not be a retrospective adjustment. I believe the most appropriate treatment would be to continue to amortize all the incentives over the full life of the lease, even though the lease now covers a smaller asset. Any deferred rent (if there are previously scheduled rent increases) would likewise continue to be leveled over the remaining life of the lease (based on the new scheduled rents), with no write-off of the portion applicable to the terminated floor. These answers are based on FASB Technical Bulletin 88-1, question 2.

Note, however, that if you have leasehold improvements associated with that floor, those assets should be written off as of the early termination date. If there's a substantial amount of time remaining between when you serve notice and when the lease ends, you could recalculate the depreciation using just the remaining life.


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