Lease Incentives (FRS 102): Rent-Free, Fit-Outs
A lease incentive is a benefit the landlord gives you to take the lease: a rent-free opening, a cash contribution, a fit-out payment, or a reimbursement of your moving costs. Where it lands in the accounts depends on one thing, and it is the thing most often got wrong: when you receive it.
The rule that catches people out
An incentive received at or before the commencement date REDUCES THE RIGHT-OF-USE ASSET. It does not reduce the lease liability. Netting a Day-1 incentive off the liability understates the liability, understates the interest charge for the whole term, and puts the disclosure notes out.
FRS 102 Reference: FRS 102.20.47(b)
The single most common Section 20 error
Incentives you receive later
An incentive that falls due after the commencement date is a receivable benefit against future payments, so it is treated as a reduction of the lease payments rather than an adjustment to the asset. That is what puts it into the liability measurement instead.
FRS 102 Reference: FRS 102.20.51(a)
| When you receive it | What it reduces | Effect |
|---|---|---|
| At or before commencement | The right-of-use asset | Lower asset, so lower depreciation over the term. Liability unchanged. |
| After commencement | The future lease payments | Lower liability, so lower interest, and a lower asset because the asset is built on the liability. |
A rent-free period is an incentive too
A rent-free opening is not a gap in the lease and it is not free rent. The months are part of the term and part of what you discount; there is simply no payment in them. The liability still accrues interest across a rent-free opening, so the balance rises before it starts to fall. Lease102 holds a rent-free period as a rate of zero across a span of dates rather than deleting the months.
What counts as an incentive
The test is whether the landlord is giving you a benefit to induce you into the lease.
Cash contribution
A lump sum paid by the landlord on completion. Reduces the right-of-use asset if received at or before commencement.
Fit-out contribution
A payment towards your fit-out works. Still an incentive even though you spend it on your own asset: the contribution reduces the right-of-use asset, and the fit-out itself is your own property, plant and equipment.
Rent-free or reduced-rent period
Held as a dated rate span. A reduced rate is not the same as rent-free, and pricing one as the other is a common source of error.
Reimbursed moving or surrender costs
Where the landlord meets costs you would otherwise bear to induce you into the lease.
What is not an incentive
A landlord contribution reduces the asset. Your own costs of obtaining the lease increase it, and are a different thing entirely: legal fees, agent commission and stamp duty land tax are initial direct costs. Do not net the two off against each other; record each on its own footing so the disclosure notes and the audit trail show both.
Worked example
An office lease with a fit-out contribution received on completion.
FRS 102 Reference: FRS 102.20.47
Day-1 incentive against the asset