In a renewal, how do you account for the tenant improvement allowances under the previous lease?
In a previous blog post I explained how to account for tenant improvement allowances on a new operating lease under GAAP. In this post, I will explain how to account for the initial (previous) tenant improvement allowance when an operating lease is renewed.
Recall from my previous post that when you receive a tenant improvement allowance, it should be recorded as a liability which is amortized (as a reduction to rent expense) over the life of the lease. If the lease is extended as part of a renewal, the unamortized balance of the initial tenant improvement allowance should be amortized over the remaining term of the revised lease. What we see often is that companies just continue to amortize the TI Allowance over the initial lease term without adjusting the amortization period to reflect the new lease term. This is NOT GAAP and it is WRONG. Companies that do that are essentially understating expense.
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