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Commission Regulation (EC) No 1725/2003 of 29 September
2003 adopting certain international accounting standards
in accordance with Regulation (EC) No 1606/2002 of the
European Parliament and of the Council.
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Operating leases - incentives
Paragraph 11 of IAS 1 (revised 1997), presentation of
financial statements, requires that financial statements
should not be described as complying with International
Accounting Standards unless they comply with all the
requirements of each applicable standard and each applicable
interpretation issued by the Standing Interpretations
Committee. SIC interpretations are not intended to apply to
immaterial items.
Reference: IAS 17, leases (revised 1997).
Issue
1. In negotiating a new or renewed operating lease, the
lessor may provide incentives for the lessee to enter into the
agreement. Examples of such incentives are an up-front cash
payment to the lessee or the reimbursement or assumption by
the lessor of costs of the lessee (such as relocation costs,
leasehold improvements and costs associated with a
pre-existing lease commitment of the lessee). Alternatively,
initial periods of the lease term may be agreed to be
rent-free or at a reduced rent.
2. The issue is how incentives in an operating lease should
be recognised in the financial statements of both the lessee
and the lessor.
Consensus
3. All incentives for the agreement of a new or renewed
operating lease should be recognised as an integral part of
the net consideration agreed for the use of the leased asset,
irrespective of the incentive's nature or form or the timing
of payments.
4. The lessor should recognise the aggregate cost of
incentives as a reduction of rental income over the lease term,
on a straight-line basis unless another systematic basis is
representative of the time pattern over which the benefit of
the leased asset is diminished.
5. The lessee should recognise the aggregate benefit of
incentives as a reduction of rental expense over the lease
term, on a straight-line basis unless another systematic basis
is representative of the time pattern of the lessee's benefit
from the use of the leased asset.
6. Costs incurred by the lessee, including costs in
connection with a pre-existing lease (for example costs for
termination, relocation or leasehold improvements), should be
accounted for by the lessee in accordance with the
International Accounting Standards applicable to those costs,
including costs which are effectively reimbursed through an
incentive arrangement.
Date of consensus: June 1998.
Effective date: this interpretation becomes effective for
lease terms beginning on or after 1 January 1999.
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