Lease Accounting when Tenant Must Return the Asset to its Initial Condition.

Lease Accounting

Have you ever entered into an operating lease for a building, constructed leasehold improvements, and determined based on the provisions of the lease that you are legally obligated to remove the leasehold improvements at the end of the lease? Did you account for this transaction correctly under GAAP? Are you willing to bet on it? Better yet, are you willing to bet your job on it?

Our last blog addressed how to account for leases where the tenant has the option to terminate the lease at will (without penalty).  In this blog post, we will explain how to account for a lease when the tenant/lessee has an obligation to return the asset back to its condition at the inception of the lease. We will begin by explaining the lease accounting treatment under GAAP, followed by a comprehensive example using actual numbers.

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About LeaseQuery:  LeaseQuery is lease management software that helps companies manage their leases.  Rather than relying on excel spreadsheets, our clients use LeaseQuery to get alerts for critical dates (renewals, etc), calculate the straight-line amortization of rent and TI allowances per GAAP, provide the required monthly journal entries (for both capital and operating leases) and provide the commitment disclosure reports required in the notes and the MD&A.  Contact us here.

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