NetLease - Lease Incentive Best Practices

Lease incentives are cash concessions received from a lessor that reduce the lease expense recognized over the term of a lease. These lease incentives can be received before a lease begins or during the life of the lease. Lease incentives should be entered either in the lease incentive field on the lease record or as a reduction to the payment amount in the month that it occurs (can be negative if the payment received is greater than is what is paid for that month). 

When timing of lease incentive is uncertain:

Netgain recommendation: Include lease incentive in lease incentive field. Track future receipts offline. When a payment is received after commencement date, make the following journal entry:

At lease commencement: 

  1. Record entire lease incentive amount into the lease incentive field on the lease header. (The system will debit ROU Clearing for the amount of the lease incentive.)
  2. Reclassify unpaid lease incentives from ROU clearing account into a debit balance short term lease liability contra account.  

Debit: Lease Incentive Receivable 

Credit: ROU Clearing

Upon receipt of lease incentive record the following entry:

Dr: Cash

Cr: Lease Incentive receivable

Pros of this approach: 

  1. Segregates lease payments from future lease incentive receipts. 
  2.  Removes need to modify lease each time expected lease incentive payment timing is changed. 

Cons of this approach:

  1. Does not record future incentives at discounted value. It is misstated by the discounting on the lease incentive, however this timing is uncertain anyway. 
  2. Assumes incentive receivable is short term (due within 12 months). 
  3. Additional adjustments required to disclosures to include lease incentive amounts not yet received. 

When timing is predictable

Netgain recommendation - Include lease incentive payments received as a reduction of lease payment in the month received (payment can be negative if the amount received exceeds the monthly lease payment due). 

Pros of this approach: 

  1. No manual journal entries are required. All lease payments go through lease payable clearing account. 
  2. Lease liability is accurate (including discounting on lease incentives receivable. 

Cons of this approach:

  1. Requires a modification each time payment timing changes. 
  2. Assumes lease incentive payment timing is predictable or contractually specified.
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