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Operating Lease Costs

Jin Cha's Profile

Hi,

We're re-negotiating our office lease and, in the process, incurring legal costs.  It's an operating lease.  Our CFO wants to capitalize this cost but I can't see how this is possible.  There is no future economic benefit.  What do you think?  Am I missing something here?

Thanks

Answers

michael nwogugu
Title: svp
Company: dentamach international inc
(svp, dentamach international inc) |

your CFO is right: a) effective last year, the new accounting rules require capitalization of most operating leases; b) the office lease generates future revenue in future accounting periods - it builds the brand, and other intangibles.

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

Michael's answer as far as the requirements are spot on. But I don't believe that most of the operating leases actually meet the original definition of asset and as such imho, the changes were made to distribute tax dollars, not revenue benefits.

Dabney Wellford
Title: CFO
Company: Wellford Consulting
(CFO, Wellford Consulting) |

Last I checked, the rules are still in draft stage. Intrinsically, you need to look at the materiality of the legal costs and whether the costs added value to the lease. If the CFO is deferring costs due to bad months, looking for a better day, the costs could come back to haunt you later. If you are required to defer, amortize over the remainder of the year.

This treatment may not be exactly by the book, but if you get into the mode of constantly defering costs, you can easily lose track, building up a huge nut to cover each month before getting to actual operations.

Jin Cha
Title: Manager
Company: Wilshire Associates
(Manager, Wilshire Associates) |

Thanks everyone. Any of you have a link to this new literature?

Michael - I'm assuming you mean "capitalization of most operating lease costs" and not the lease payments? Also, we're just renting a space in a building (don't have any logo/advertisement on top of the building) so how does it generate future revenue/buidling brand?

Dabney - I believe it does add value. It's for a specific issue and not just general reviewing of lease,

Any of you know if commissions we pay to agents should also be capitalized? This is just standard service of using an agent for the lease so don't think it's value adding.

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

Here is the link to the latest guidance that is still at exposure draft stage. After this guidance is approved, all the operating leases will be required to be capitalized.

http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011123

Michael Keeler
Title: CEO and President
Company: LeaseAccelerator
(CEO and President, LeaseAccelerator) |

The new lease accounting standards are not likely to go into effect until 2017. We are now waiting for the re-exposure draft from the joint FASB-IASB committee, expected to be released in Q4 2012. They will evaluate responses, continue discussions, and issue the final standard Q4 2013 at the earliest. See Sunil's link to the FASB website above for the details. For equipment leases, check out the whitepaper here: www.lesseeadvocate.com.

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