In negotiating a new or renewed operating lease, the lessor may provide incentives for

the lessee to enter into the agreement. The lessor or the lessee (or both) may also incur
costs that are directly attributable to negotiating and arranging a lease. However, IAS 40
provides no specific guidance on accounting for lease incentives and initial costs of
obtaining a lease.
4.9.1 Lease incentives
Lease incentives are defined as ‘payments made by a lessor to a lessee associated with
a lease, or the reimbursement or assumption by a lessor of costs of a lessee’.
[IFRS 16 Appendix A]. In practice, 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 preexisting
lease commitment of the lessee). Alternatively, initial periods of the lease term
may be agreed to be rent-free or at a reduced rent.
Under IFRS 16, lease incentives are deducted from ‘lease payments’ made by a lessee to
a lessor relating to right-of-use asset during the lease term. [IFRS 16 Appendix A]. Accordingly,
for lessees, lease incentives that are received by the lessee at or before the lease
commencement date redis cash or kind to contract holders for losses suffered while travelling b.
Financial guarantee contract that requires payment even if the holder has not insured a loss on
the failure of the debtor to make payments when due c. Deferred annuity contract where the
holder will receive or can elect to receive a life contingent annuity at rates prevailing when the
annuity begins d. Loan contract containing a pre-payment fee that is waived if pre-payment
results from the borrower’s death 13. Identify which of the following are insurance contracts: a.
Financial guarantee contract that requires payment even if the holder has not insured a loss on
the failure of the debtor to make payments when due b. Deferred annuity contract where the
holder will receive or can elect to receive a life contingent annuity at rates prevailing when the
annuity begins c. Loan contract containing a pre-payment fee that is waived if pre-payment
results from the borrower’s death d. A contract that requires specified payments to reimburse
the holder for a loss it incurs because a specified debtor fails to make payment when due 14.
Identify which of the following are insurance contracts: a. A catastrophe bond in which principal
interest payments are reduced significantly if a specified triggering event occurs and the
triggering event includes a condition that the issuer of the bond suffered a loss b. Loan contract
containing a pre-payment fee that is waived if pre-payment results from the borrower’s death c.
Financial guarantee contract that requires payment even if the holder has not insured a loss on
the failure of the debtor to make payments when due d. Deferred annuity contract where the
holder will receive or can elect to receive a life contingent annuity at rates prevailing when the
annuity begins 15. An insurance contract can contain both deposit and insurance elements. An
example might be a reinsurance contract where the cedent receives a repayment of the
premiums at a future time if there are no claims under the contract. Effectively this constitutes a
loan by the cedent that will be repaid in the future. PFRS 4 requires that: a. Each payment by
the cedent is accounted for as a loan advance and as a payment for insurance cover b. The
insurance premium is accounted for as a revenue item in the income statement c. The premium
is accounted for under PFRS 15 d. The premium paid is treated purely as a loan and is
accounted for under PFRS 9
16. Which of the following accounting practices has been outlawed by PFRS No. 4? a. Shadow
accounting b. Catastrophe accounting c. A test for the adequacy of recognized insurance
liabilities d. An impairment test for reinsurance assets 17. Which of the following types of
insurance contract would probably not be covered by PFRS 4? a. Motor insurance b. Life
insurance c. Medical insurance d. Pension plan 18. PFRS says that insurance contracts should:
a. Be covered by existing accounting policies during phase one b. Comply with the PFRS
Framework document c. Comply with all existing PFRS d. Be covered by PAS 32 and PFRS 9
only 19. PFRS 4 does not apply to: a. Product warranties, which are covered by PFRS 15 and
PAS 37; b. Employer’s assets and liabilities under employee benefit plans, which are covered
by PAS 19 and PFRS 2 c. Contingent consideration payable or receivable in a business
combination, which is covered by PFRS 3, Business Combinations d. Property insurance
contract 20. Which of the following items are outside the scope of PFRS 4 unless the issuer
elects to apply PFRS 4 to such contracts? a. Financial guarantee contracts b. Motor insurance
c. Medical insurance d. Life insurance 21. PFRS 4 permits an insurer to change its accounting
policies for insurance contracts only if, as a result: a. Itsuce the initial measurement of a
lessee’s right-of-use asset.
[IFRS 16.24(b)]. Lease incentives that are receivable by the lessee at lease commencement
date reduce a lessee’s lease liability (and therefore the right-of-use asset as well).
[IFRS 16.27(a)].
For lessors, lease incentives that are paid or payable to the lessee are also deducted
from lease payments. Lease payments under operating leases are recognised by lessors
as income on either a straight-line basis or another systematic basis. [IFRS 16.81] .
Accordingly, for operating leases, lessors should defer the cost of any lease incentives
paid or payable to the lessee and recognise that cost as a reduction to lease income
over the lease term in order to recognise the lease payments as income at an amount
that is net of lease incentives.
Consequently, many lessors usually present any outstanding unamortised deferred cost
of lease incentives as a separate asset, but other lessors present these together with (or
as part of) the related investment property. However, lease incentives do not form part
of the cost of the investment property (see also 6.6.1 below for the requirement to adjust
the fair value of an investment property to avoid ‘double counting’ in circumstances
where a lease incentive exists and is recognised separately). It is therefore relevant to
distinguish between lease incentives and other capital expenditure.
There is no additional guidance in IFRS 16 to assist in the identification of incentives,
but a similar requirement existed in previous United Kingdom GAAP (in UITF
abstract 28 – Operating lease incentives) and provides helpful additional detail