At the beginning of a lease, it’s not unusual for the lessee to be given free rent for one or more periods, which results in deferred rent under current GAAP (ASC 840 and IAS 17) lease accounting rules. Instead of free rent periods resulting in zero entries, the accounting approach divides the total amount due over all periods – including the free periods – to reduce the deferred rent liability over the length of the lease.
Deferred rent can also have an impact on income tax under current lease accounting rules, due to the temporary difference between financial statement and the tax returns. Deferred rent is defined as the liability created as a result of the difference between the actual cash paid and the straight-line expense recorded on the financial statements. Typically, the deferred rent recorded is the difference between the straight-line rent recognized for book purposes and the rent deductible for tax purposes. In addition, items such as direct costs and lease incentives can increase or decrease the total deferred rent balance. Accurately tracking free or deferred rent is one of many tasks needed to perform keep lease accounting running on point. Deferred rent is one of the key inputs for proper transition to ASC 842 and IFRS 16 lease accounting standards. Accounting departments also need to track all the dates and amendments relevant to the lease including the original lease execution date, lease start date, original expiration date, current lease execution date, current possession date and the current expiration date. Feature-rich lease accounting and lease management software can ensure execution of the correct workflow processes and provide efficiencies.