Please confirm whether we are required to straight line operating leases where annual increases are inflationary (fixed percentage or based on CPIX) in terms of IFRS for SMEs and IFRS / SA GAAP.

In terms of IFRS / SA GAAP, any fixed percentage increase would have to be smoothed. If the lease merely says "increases in line with CPI" then it would not need to be smoothed. This is in terms of IAS 17(AC 105) Leases and the SAICA circular 12/2006 Operating Leases, which states: This circular addresses fixed rental increases in relation to operating leases on all types of assets. Variations in lease payments that are linked to other factors such as inflation rates or turnover are contingent rentals, the accounting treatment of which was discussed by the IFRIC in July 2006, and the IFRIC agenda decision is set out below. In the IFRIC meeting of July 2006 this issue was discussed. The following was noted as its decision in the IFRIC Update of the same date: "The IFRIC noted that, although the Standard is unclear on this issue, this has not, in general, led to contingent rentals being included in the amount to be recognised on a straight line basis over the lease term. Accordingly, the IFRIC decided not to add this issue to its agenda but to recommend to the Board that IAS 17 be amended to clarify the approach intended by the Standard". The APC therefore advises that contingent rentals do not need to be included in the lease payments/lease income to be recognised on a straight-line basis over the lease term". The same principle applies under IFRS for SMEs unless section 20.15(b) is met. This states: "the payments to the lessor are structured to increase in line with expected general inflation (based on published indexes or statistics) to compensate for the lessor's expected inflationary cost increases. If payments to the lessor vary because of factors other than general inflation, then this condition (b) is not met." Therefore if the fixed increase is in line with a published index at the time the lease is entered into, no smoothing will be required. It seems that this is rarely the case unless the lease is specifically structured to avoid smoothing.