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Sublease and Leasehold improvements

JD Greenway's Profile

Accounting For Leasehold ImprovementsFacts: Company A is in three year lease term for an office rental space, starting December 1, 2013, after 1 year Company A decided to move to a big location. Instead of terminating the lease agreement, Company A subleases the office rental space to Company B, (Company A still has the primary obligation to the original lessor). On December 30, 2014 the sublease as signed. Company B moves in and Company A moves out on January 1, 2015. The remaining balance of the leasehold improvement at the original location were $750,000. Company A is moves into the new location June 30, 2015. The current date is December 9, 2014. What period should the remaining balance of the leasehold improvement at the original location be written off: 1) No change - write off over the remaining term of the original lease agreement as Company A still has the primary obligation therefore the sublease and original lease would be accounted for separately. 2) As of the date the sublease was signed, December 30, 2014, the leasehold improvement should be written off over the shorten period until Company A moves out of original location, January 1, 2015, as Company A is no longer using those asset in operation of the Company. 3) Write off as leasehold improvement abandonment as the move out date, January 1, 2015. 4) Some other answer Interested in knowing what anyone thinks?

Answers

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I'm not an expert on leases however we moved out of a location before the lease was up and we continued to expense the portion of the lease until the term was up. We received reimbursement from our carrier for a portion of it, which at that point we would allocate the credit against the expense so all that remained for that location was the current lease amount. Our CPA had no issues with us doing it that way. The monthly expense still belongs to Company A. If Company B walks away Company A is still liable, so I think you would be fine to stick with option 1, which is what we did.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Never could justify the reasoning behind capitalizing a LI (where you don't own the property), when at the end of the day, that improvement belongs to the landlord.

The asset as shown on the books is bogus, and most if not all creditors already take this number out of any equation they use when appraising the business.

Anyone with a different insight?

JD Greenway
Title: Manager
Company: ABC Management
(Manager, ABC Management) |

The logic behind capitalizing leasehold improvements is a result of the Company having the rights to use the asset over the lease term. Those rights are an asset which are amortized over the lease term.

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

Under the theory that the improvements created enhancements that are now a benefit to the sublessee and are being partially recovered as part of the rental income, I would argue that the LIs have not been abandoned and should therefore continue to amortize over the life of the lease.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

You don't indicate if the sublease covers the cost of the original lease and/or runs through the full term of the original lease. If not, you have indications of impairment that would require you to do a test for recoverability under ASC 360-10, Impairment and Disposal of Long-Lived Assets. Depending on the results, you may have an impairment loss to recognize. If the sublease ends before than the original lease expiration date you should also adjust the leasehold improvement estimated useful lives.

If the amount of the leasehold improvements is material you would also be required to reclassify the assets as held and used until disposed of.

Here's some light reading for you:

http://www.ey.com/Publication/vwLUAssets/EY-impairment-or-disposal-of-long-lived-assets/$FILE/EY-impairment-or-disposal-of-long-lived-assets.pdf.

JD Greenway
Title: Manager
Company: ABC Management
(Manager, ABC Management) |

The sublease covers the cost of the original lease and runs through the full term of the original lease.

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