The IFRIC Agenda Committee has considered the question of the period over which a lease incentive should be recognised as a reduction in rental expense (by a lessee) or a reduction of rental income (by a lessor) in the case of a lease that provides that, during its term, the rental shall be repriced to market rates. UITF Abstract 28 specifically addresses this issue; SIC-15 'Operating Leases - Incentives' does not.

The Agenda Committee has recommended that this issue should not be taken on to IFRIC's agenda. The draft reasons for rejection, as published in IFRIC Update April 2005, are reproduced below:

"The IFRIC considered the appropriate period over which to recognise an incentive for an operating lease, when an incentive is provided and the lease contains a clause that requires rents to be repriced to market rates.

Two possible approaches for the period over which to recognise the incentive:

• recognise the incentive over the full term of the operating lease;
  
  
• recognise the incentive over the shorter of the lease term and a period ending on a date from which it is expected that the prevailing market rentals will be payable. [as required by UITF Abstract 28]

The IFRIC noted that SIC-15.5 states:

'the lessee shall 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.'

The IFRIC took the view that the wording of SIC 15.5 is clear and did not accept an argument that the lease expense of a lessee after an operating lease re-priced to market ought to be comparable with the lease expense of an entity entering into a new lease at that same time at market rates. Nor did the IFRIC believe that the repricing itself would be reflective of a change in the time patterns referred to in SIC 15.5.

The IFRIC decided not to undertake a project to modify SIC 15."

The Agenda Committee’s recommendation confirms there is a significant difference between UK requirements and IFRS on this issue. For example, where the rental is set at a newly-agreed market rental in years 6 and 11 of a 15 year lease, under UITF Abstract 28 the rental expense for years 6-10 and 11-15 is the newly agreed amount; under SIC-15 one fifteenth of the incentive received at lease inception continues to be deducted from the recognised lease expense or income each year. This issue is relevant to many UK and Irish companies that are preparing for the transition to IFRS; they will need to examine all leases on which incentives were given at inception with a view to restating their results to reflect a change in accounting policy.

The Agenda Committee's recommendation will be discussed by the IFRIC at its June meeting.

Constituents who wish to comment on the issue are advised to write to IFRIC as soon as possible, and before the IFRIC's next meeting on 2-3 June.