more-arw search

Q&A Forum

Capital lease with rent expense before start of lease

Kathleen Reardon's Profile

Hi all, we leased some capital equipment and the leases began quarterly as equipment was delivered across branches. We were charged rent for the space of time we had the equipment before they started the lease on quarterly cycles. Has anyone made a case for capitalizing that piece? Our CFO would love to move it off the operating portion of our financials....thought I'd reach out although it seems clear cut.... thanks, Kathleen

Answers

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

Disclaimer: I come from the lessor business side and not the accounting world. You describe a standard leasing practice when there are multiple pieces of equipment under a lease, or multiple funding times (e.g., a lengthy construction period) for an equipment project that will be leased, or simply a desire to achieve a consistent or specific repetitive billing cycle date. This is nothing more than interim/additional rent expense for a transaction with a term of, say, 12 quarters and 21 days instead of exactly 12 quarters.

It is, indeed, clear cut. Capitalization is not the correct strategy.

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

I agree with Jim's response above according to the current guidelines.

There is a Leases Joint Project of the FASB and IASB currently underway, which issued an Exposure Draft in May 2013 and was last updated on October 28, 2014. From what I am seeing, when a final pronouncement is issued the accounting will change and interim rent will be recognized as a rent prepayment and at the commencement date the prepayments will be included in the cash flow discounting to determine the value of the right-of-use asset and capitalized lease obligation.

Kathleen Reardon
Title: Controller
Company: South Shore YMCA
(Controller, South Shore YMCA) |

Thank-you gentlemen,

I appreciate the responses and it does confirm what I could see in delving into the subject. Good to know future changes though as we may lease again,
happy Halloween!

2288 views
Topics

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.