Operating lease incentives

The IFRIC has formally decided not to consider modifying SIC-15 'Operating Leases - Incentives' to address the treatment of lease incentives in property leases that require rents to be repriced to market rates. There is, as a result, a significant difference between UK requirements (UITF Abstract 28 'Operating lease incentives') and IFRS in respect of the period over which incentives should be spread.

The reasons for IFRIC's rejection, as published in IFRIC Update August 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 are:

• recognise the incentive over the full term of the operating lease; or
• recognise the incentive over the shorter of the lease term and a period ending on a date from which it is expected the prevailing market rentals will be payable.

The IFRIC noted that SIC-15.5 requires:

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 thought the wording of SIC- 15.5 was clear and did not accept an argument that the lease expense of a lessee after an operating lease repriced 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 of itself would be representative of a change in the time pattern referred to in SIC-15.5.

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

The requirements of SIC-15 and UITF 28 apply to both recognition of rental income by lessors and recognition of rental expense by lessees. UITF 28 requires an incentive to be recognised over the shorter of the lease term and a period ending on a date from which it is expected the prevailing market rentals will be payable. The effect of switching from UITF 28 to SIC-15 is that a lessor and a lessee will respectively report a greater rental income and expense in each year until rent is repriced to market rent, and income and expense that is lower than market rent thereafter. Furthermore, a lessor will continue to report an asset and a lessee will continue to report a liability relating to the lease incentive after the lease has been repriced to market rent.

The UITF has noted IFRIC's decision on this issue. It has no current plans to modify Abstract 28.

Entities that have given or received incentives on such operating leases and are switching from UK standards to IFRS will need to restate their accounts to comply with SIC-15.

Waste electrical and electronic equipment ('WEEE')

IFRIC Interpretation 6 'Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment' was issued on 1 September. It clarifies when certain producers of electrical goods should recognise a liability for waste management costs relating to decommissioning of equipment sold to private households under the model specified in the EU's WEEE Directive for attributing costs to producers who are currently participating in the market, ie based on market share. IFRIC 6 concludes that participation in the market during a measurement period (rather than the manufacture or sale of the equipment) is the obligating event that gives rise to the recognition of a liability.

The UK Government announced in August that it plans shortly to transpose the main provisions of the WEEE Directive into UK law. The UITF has decided to issue an Abstract based on IFRIC 6, which will be finalised after the applicable UK legislation has been published.

Status of other draft Abstracts

Retirement benefits. A draft Abstract 'Retirement Benefit Schemes with a Promised Return on Contributions or Notional Contributions', an adapted version of IFRIC D9, was issued in July 2004 (in Information Sheet 67). The IFRIC has not yet decided whether or not to issue a final Interpretation.

Embedded derivatives. A draft Abstract 'Reassessment of Embedded Derivatives', which sets out the text of IFRIC D15, was issued in March 2005 (in Information Sheet 75). The IFRIC is analysing comments on D15.

Share-based payments. Two draft Abstracts 'Scope of FRS 20 (IFRS 2)' (see Information Sheet 76) and 'FRS 20 (IFRS 2) - Group and Treasury Share Transactions' (see Information Sheet 77) were issued in June 2005. They set out respectively the texts of draft IFRIC Interpretations D16 and D17. The IFRIC is analysing comments on D16 and D17.