Lease incentive - unamortised balance from lessor's perspective

[Sarah]

Hi,

Hoping for some insight into a specific example. From a lessor's perspective, if you have a lease and lease incentive given but the lease was re-geared to an FRI lease, therefore resulting in a surrender of the existing lease and creation of the new lease - what would happen to the unamortised balance of the lease incentive?
Would this go straight to P/L or would there be an option to continue amortising it over the new lease terms?

Thanks in advance,
Sarah

[Marek Muc]

What were the terms of these incentives?

[Sarah]

It was a rent free granted. The lease changed because the tenant moved to a bigger building. The deal would have been a re-gear but due to this change, the old lease was surrendered and a new lease entered into. The terms of the lease period was also extended and an additional rent free was granted.

Under IFRS 16.87, if a lease is modified, the lessor accounts for it as a new lease from the date the modification takes effect. Any prepaid or accrued lease payments relating to the original lease are considered part of the lease payments for the new lease. Would the balance of the unamortised rent free be considered as part of this?

And are there options / different circumstances that allow one to continue amortising over the new lease term vs put it straight to P/L?

[Marek Muc]

I don't think you can incorporate the rent-free period from the previous lease in the calculation or measurement of the new lease. BTW, rent-free periods aren't lease incentives as per IFRS 16 - they are simply a method to distribute the total lease payments over the lease term