Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Australian Government Department of Finance and Administration Accounting Guidance Note No. 2007/3 Accounting guidance notes are intended for use by Australian Government reporting entities covered by: S49 of the Financial Management and Accountability Act 1997; or Clause 2 of Schedule 1, of the Commonwealth Authorities and Companies Act 1997. The aim of the accounting guidance notes is to provide non-mandatory explanation and examples relating to the interpretation and application of Australian Accounting Standards and the Finance Minister’s Orders to the above entities. Accounting for Lease Incentives Purpose To provide guidance on the accounting for lease incentives by the lessee. Target audience This guidance note applies to Australian Government entities in receipt of lease incentives provided as an inducement to enter into an operating lease. Finance leases are excluded from the scope of this guidance. Applicable accounting pronouncements Interpretation 115 Operating Leases – Incentives. AASB 117 Leases. Definitions used Lease incentives are benefits offered by the lessor to induce another party to enter into, or renew an operating lease. Examples include: rent free periods (or reduced rentals); upfront cash payment to the lessee (including the assumption of costs); and capital incentives in the form of assumption of costs by the lessor (i.e. relocation costs, leasehold improvements, and costs associated with preexisting lease commitment of the lessee). Page 1 of 5 Accounting Guidance Note 2007/3 Department of Finance and Administration Key points 1. Lease incentives received are recognised as a reduction of rental expense over the lease term on a straight-line basis unless another systematic basis is more reflective of the time pattern of the lessee’s benefit (Interpretation 115.5). 2. A straight-line basis is appropriate when the benefits received are expected to be spread evenly over the lease term. For example, a property lease where the same building is leased over several years. 3. Where the benefits are not spread evenly an alternative method that appropriately reflects this pattern should be used. For example where the benefit is based upon output from machines, an approach such as recognition based upon machine hours would be appropriate. Disclosure requirements 4. There are no specific disclosure requirements for lease incentives in AASB 117 and Interpretation 115. Illustrative examples Illustrative example 1 – Rent free periods Information: A rent free period of one year is received on a five year lease, with an annual rental of $25,000 per year. Answer: The value of incentive is obtained by dividing the total minimum lease payments to be made under the lease by the lease term or ((25,000 x 4)/5 = $20,000). The entity will initially recognise a liability and a matching asset, over the rent free period the asset is expensed as the rent free period is utilised. Debit Credit Year 0 (lease inception) Lease asset (rent free period) 20,000 Lease incentive liability 20,000 Year 1 Lease expense Lease asset (rent free period) Page 2 of 5 20,000 20,000 Accounting Guidance Note 2007/3 Department of Finance and Administration Debit Credit Year 2 to 5 (this journal is repeated) Lease expense 20,000 Lease incentive liability 5,000 Cash 25,000 The effect of the above journals is that $20,000 is recognised as a lease expense in each period. Note - In practice, entities might not recognise a lease asset for the rent free period. Instead, these entities build up their lease incentive liability each month as they recognise the lease expense during the rent free period. In the above example this would result in the transactions reported in Year 0 and 1 being replaced by a monthly journal of debit lease expense $1,666.67 and credit lease incentive liability $1,666.67. Illustrative example 2 - Upfront cash payment to the lessee Information: The lessee receives an upfront cash payment of $2,400 to enter into a new lease. The new lease has a term of 3 years and an annual rental of $26,000 per year. Answer: The liability (incentive) is recognised as a reduction in lease expense over the life of the lease. Debit Credit Year 0 (lease inception) Cash 2,400 Lease incentive liability 2,400 Year 1 to 3 (this journal is repeated) Lease expense (26,000 – 2,400/3) 25,200 Lease incentive liability (2,400/3) 800 Cash 26,000 Illustrative example 3 - Units of production method – expected use Information: The lessee receives an upfront cash payment of $10,000 to enter a 2 year lease with an annual rent of $40,000 for machinery. The machinery can only be used for 30,000 hours in year 1 and only 10,000 hours in year 2 due to maintenance (total hours = 40,000) Page 3 of 5 Accounting Guidance Note 2007/3 Department of Finance and Administration Answer: In this example the rental expense under AASB 117 and the lease incentive are not recognised on a straight line basis, as the expected benefit from the asset varies not in accordance with time (year one: ¾ of the benefit, year two: ¼ of the benefit). The rent expense and reduction of the lease incentive are recognised on the basis of the benefit. To illustrate this, the transaction has been separated into two journals. Rent expense Reduction of lease incentive Year 1 ¾ x 80,000 = 60,000 ¾ x 10,000 = 7,500 Year 2 ¼ x 80,000 = 20,000 ¼ x 10,000 = 2,500 Debit Credit Year 0 (lease inception) Cash 10,000 Lease incentive liability 10,000 Year 1 Lease expense journal Lease expense 60,000 Rent payable liability (future period) 20,000 Cash 40,000 Lease incentive journal Lease incentive liability 7,500 Lease expense 7,500 Year 2 Lease expense journal Lease expense 20,000 Rent payable liability (future period) 20,000 Cash 40,000 Lease incentive journal Lease incentive liability Lease expense Page 4 of 5 2,500 2,500 Accounting Guidance Note 2007/3 Department of Finance and Administration Illustrative example 4 - Capital incentive – payment of relocation costs Information: The lessor agrees to pay relocation costs incurred by the lessee as an incentive to the lessee to enter into the new lease. The new lease has a term of 4 years and an annual rental of $25,000 per year. Relocation costs are $1,000. Answer: Debit Credit Year 0 (lease inception) Relocation cost expense* 1,000 Lease incentive liability 1,000 Year 1 to 4 (this journal is repeated) Lease expense Lease incentive liability Cash 24,750 250 25,000 * Relocation costs are recognised in the income statement as an expense in the period they are incurred (Interpretation 115.11). Note – Another common form of incentive is contribution of non-monetary assets, such as leasehold improvements. The incentive is accounted for the same as above but an asset recorded instead of a relocation expense. This asset will then be accounted for using the applicable accounting standard. Contacts Questions or comments about this Guidance Note should be addressed to Accounting Policy Branch at [email protected] Page 5 of 5 Accounting Guidance Note 2007/3 Department of Finance and Administration