FINANCIAL STATEMENTS 3Consolidated financial statements as of December 31, 2017 Note 6 Notes to the financial statements: Comprehensive Income Statement 6.1 Gross rental income Accounting policies Leases According to IAS 17, the Group distinguishes two types of leases: > finance lease, which is a lease that transfers substantially all the risks and rewards inherent in the ownership of an asset to the lessee. Title to the asset may or may not eventually be transferred at the end of the lease term; > other leases are classified as operating leases. Recognition of stepped rents and rent-free periods Gross rental income from operating leases is recognized over the full lease term on a straight-line basis. Stepped rents and rent-free periods are recognized as additions to, or deductions from, gross rental income for the fiscal year. The reference period adopted is the first firm lease term. Entry fees Entry fees received by the lessor are recognized as supplementary rent. Entry fees are part of the net amount exchanged between the lessor and the lessee under a lease. For this purpose, the accounting periods during which this net amount is recognized should not be affected by the form of the agreement or the rent payment schedule. Entry fees are spread over the first firm lease term. Early termination indemnities Tenants who terminate their leases prior to the contractual expiration date are liable to pay early termination penalties. Such penalties are allocated to the terminated contract and credited to income for the period in which they are recognized. Gross rental income includes: > rents from investment property and rent-related income, such as car park rentals and early termination indemnities; > other rental income: income from entry fees and other income. Stepped rents, rent-free periods and entry fees are spread over the fixed term of the lease. Charges invoiced to tenants are not included in gross rental income but deducted from rental expenses (with minor exceptions in Scandinavia and Turkey). 6.2 Land expenses (real estate) Accounting policies Building leases: IAS 40 and IAS 17 Land and building leases are classified as operating or finance leases, and are treated in the same way as leases for other types of assets. Klépierre considered for the majority of land and building lease contracts the criterion of operating lease was fulfilled. Initial payments made in this respect therefore constitute pre-lease payments, and are amortized over the term of the lease in accordance with the pattern of benefits provided. Analysis is on a lease-by-lease basis. Land expenses (real estate) correspond to lease payments (or depreciation of initial payments) for properties built on land subject to a building lease or an operating contract (concession). 102 KLÉPIERRE 2017 REGISTRATION DOCUMENT