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How to account for payment made by lessor to terminate legal agreement

Joshua Bourquard's Profile

Hi everyone,

I have a question regarding accounting for the legal payment made by a lessor to the company (lessee) to terminate a rental agreement of leased communication lines. The lessor would like to terminate the current operating lease agreement we have with them so that they may enter into a new agreement with the company completely separate of current lease agreement. The lessor is willing to pay us to get out of this contract but we do not want to recognize the payment as an incentive needing to be recognized over the life of the new lease but rather as a legal agreement to end the old lease separate from the new lease. This way the lessee can recognize the termination payment from the lessor immediately rather than over time for a current/new contract. How can we account/structure this by GAAP to terminate old lease and recognized lessor termination payment immediately? Thank you for your advice.

Answers

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

I would (not knowing any specific GAAP pronouncement) zero out the deferred asset account to revenue and recognize the final payment that is above and beyond in the same revenue account.

In other words, the total of payments made equal the total of revenue recognized since the beginning of the lease.

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