Lease and Leasehold Improvements free essay sample

The lease entered between NeedsSpace and WeHaveIt is for a 10-year term where NeedsSpace agreed to no option to renew or the ability to negotiate a renewal of the lease term. This lease has been classified as an operating lease. WeHaveIt included two provisions in the lease agreement that NeedsSpace had to follow during the lease term. The first provision required was for NeedsSpace to perform general repairs and maintenance on the leased property. The second provision required was for NeedsSpace to restore the leased property to its original condition at the end of the lease term by removing all leasehold improvements. NeedsSpace had placed onto the leased property various leasehold improvements such as temporary walls, HVAC, and carpeting. These leasehold improvements had an economic useful life of 10 years. In this case of NeedsSpace, the requirement is to use the appropriate accounting treatment for the two provisions that were included in the lease agreement. We will write a custom essay sample on Lease and Leasehold Improvements or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Provision 1 According to ASC 840-10-05-9(a), the lessee have certain obligations for the repair and maintenance of leased property. Provision 1 creates a contractual obligation requiring NeedsSpace to perform general repairs and maintenance on the leased property. In some repairs and maintenance obligations, the lessee is required to make maintenance deposits to the lessor to protect the leased property and is reimbursed later when the required repairs and maintenance is completed by the lessee according to ASC 840-10-05-9(a) through 840-10-05-9(c). Provision 1 does not require NeedsSpace to make maintenance deposits but does require NeedsSpace to perform the repairs and maintenance on the leased property. The maintenance deposits do not effect NeedsSpace’s obligation to perform the repairs and maintenance, but does assure NeedsSpace’s performance under the lease. Minimum lease payments for the lessee comprise of payments the lessee is obligated to make with the leased property, excluding the lessee’s obligation to pay executory costs such as maintenance in relation to the leased property according to ASC 840-10-25-5. Maintenance deposits are related to the maintenance of the lease property and should be accounted for as executory costs and not included in the minimum lease payments. If a lessee determines the maintenance deposits is less probable of being reimbursed, the maintenance deposits are recognized as additional expense, until the actual maintenance occurs; then the maintenance costs are expensed or capitalized according to the lessee’s maintenance accounting policy according to ASC 840-10-25-39(a) through (b) and ASC 840-10-25-39(a). WeHaveIt is not obligated to reimburse NeedsSpace of its maintenance deposits as it only requires NeedsSpace to perform the repairs and maintenance on the leased property. As the maintenance deposits (executory costs) involves â€Å"general† repairs and maintenance on the leased property, NeedsSpace should recognize the repairs and maintenance obligation by expensing the repairs and maintenance when it actually occurs. Provision 2 According to ASC 410-20-15-3(e), if a conditional obligation for the lessee exist to perform a retirement activity with the leased property, the lessee accounts for the obligation as an asset retirement obligation (ARO) unless it is included in the minimum lease payments. As mentioned above, minimum lease payments of the lessee are payments the lessee is obligated to make on the leased property according to ASC 840-10-25-5. Provision 2 creates an obligation requiring NeedsSpace to restore the leased property to its original condition through the removal of leasehold improvements when the lease term expires. This obligation is not included in the minimum lease payments as it relates to leasehold improvements not the leased property. As a result, this provision in the lease agreement is accounted as ARO by the lessee. Leasehold improvements in an operating lease are capitalized and amortized over the shorter of the useful life of the leasehold improvements and the lease term according to ASC 840-10-35-6. As the lease NeedsSpace entered into has no renewal option, the lease term of 10 years is the same as the useful life of the leasehold improvements. NeedsSpace should capitalize and amortize its leasehold improvements over 10 years. The ARO should be recognized as a liability at its fair value when it is incurred and reasonably estimable according to ASC 410-20-25-4. Furthermore, the fair value of the liability is recognized by increasing the carrying amount of the capitalized leasehold improvements according to ASC 410-20-25-5. NeedsSpace should recognize the ARO at the inception of the lease and amortize the costs of removing the leasehold improvements over 10 years.