In short
Lease incentives are payments a lessor makes to or on behalf of a lessee, such as cash for moving costs or reimbursement of improvements. The lessee deducts them from the lease payments, reducing the right-of-use asset.
Key takeaways
- In an operating lease, the incentive lowers the straight-line lease cost over the term.
- Rent-free periods are handled by spreading the total payments evenly over the lease term.
- Incentives received after commencement reduce the asset when received.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
At lease commencement, a lessee's lease liability is $84,000. The lessee paid $2,000 of initial direct costs and received a $3,000 lease incentive from the lessor. At what amount is the right-of-use asset initially measured?