Required; found on the Inception tab. This field is ignored if the lease is classified capital (unless the lease is part operating and has a rent holiday, as described below).
Under normal circumstances, if differing amounts of rent are paid at different times during an operating lease, the total rent is accrued and expensed on a straight-line basis over the life of the lease, and a deferred asset or liability is carried on the balance sheet for the difference between the rent expense and the actual cash paid. If this lease should be handled the normal way, check this box (which is the default).
However, scheduled rent increases can be accrued and expensed as paid if this “is more representative of the time pattern in which use benefit is derived from the leased property,” [¶15] for instance because the increases reflect availability of more property for you to use. (Note that according to FASB Technical Bulletin 88-1, if “the lessee takes possession of or controls the physical use of the property at the beginning of the lease term, all rental payments, including the escalated rents, should be recognized as rental expense … on a straight-line basis” [FTB 88-1, ¶2a], even if not all the property is being used at first.) If you do not want to level the rents (if they are operating), uncheck the box.
A lease that is part capital and part operating because it is a combined land and building lease does not normally have rent leveling, because the operating rent applied to the land is constant over the life of the lease (see Annual Land Rent Portion). However, if there is a rent holiday or a highly concessionary rent period when the rent paid is less than the calculated land rent, rent leveling is calculated (if this field is checked).
If you are a government entity, rent does not need to be levelled “when the pattern of the payment requirements, including the increases, is systematic and rational.” [GASB Statement 13, ¶5] Increases due to anticipated increases in costs (inflation) or appreciation in property values, for instance, are considered systematic and rational. In such cases, uncheck the box. However, if some of the rental payments are artificially low (for example, a rent holiday offered as an inducement or to reduce short-term cash flow requirements), rent should be levelled over the life of the lease. See Governmental Accounting for more details.
A FAS 13/IAS 17 operating lease with a level rent accrued balance converts the balance into an adjustment to the right-of-use asset at transition to ASC 842/IFRS 16.
See also
Leveled rent