Accounting for Leasehold Improvements and Lease Incentives Under New Rules
Lease incentives are any payment made to, or on behalf of, a
lessee to fund items that would otherwise be a lessee’s expense. This includes
reimbursement for moving expenses or assumption of a lessee’s pre-existing
Lease incentives reduce lease payments used for lease
classification. Additionally, the
straight-lined lease expense is reduced in an operating lease or the
straight-lined amortization expense for the right-of-use asset is reduced in a
Lease incentives also include improvements that are
considered to be assets of the lessee. Improvement allowances may be a fixed amount
or based on a certain amount per square foot.
If improvement payments are deemed to be for assets of the lessor,
then the lessor capitalizes the related cost as a fixed asset. There is no lessee accounting impact, unless
the lessee fronts the cost and is reimbursed by the lessor.
The lease agreement may clearly stipulate that the lessor
takes title to all improvements as soon as installed. In other cases, professional judgment is
required to determine whether the improvements are deemed an asset of the
lessor or the lessee.
The following could indicate that payments made by the lessor
are to fund an asset that will be owned by the lessee:
- Lessee has the right to retain or receive any
allowance amounts in excess of actual improvement costs (as either cash or a
reduction in rent).
- Lessee has discretion to use funds received by
The following could indicate that payments made by the lessee
are to fund an asset that will be owned by the lessor:
- Lessee is obligated to install specified assets as a lease condition.
- Lessee is not permitted to alter the improvements without lessor consent.
- Lessor will accrue significant residual value in the assets at the end of the lease.
Jennifer Louis has over 25 years of experience in designing and instructing high-quality training programs in a wide variety of technical and “soft-skills” topics needed for professional and organization success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses her energy on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in Audit for Deloitte & Touche LLP. Jennifer graduated summa cum laude from Marymount University with a B.B.A. in Accounting.