How to Account for Partial Lease Terminations due to COVID-19

Besides recommendations, leverage job platforms and property websites to find potential managers. These insights enable more strategic decision-making around lease versus buy analysis, as well as optimal timing for lease renewals, terminations and option exercises. Having all leases recorded centrally provides total visibility into the true costs and terms of leasing versus owning assets. Organizations can come to data-driven decisions about acquiring assets based on what makes the most financial sense. In terms of timing, portfolio analytics may reveal that certain leases are significantly below or above market rates. For below-market leases nearing expiration, you can start to determine optimal timing to renew or allow termination.

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Lease accounting hot topics for entities that have adopted ASC 842

The effective date of the partial termination modification is the date in which both lessor and lessee agree to the modified terms. After calculating the modified lease liability, the lessee should adjust the right-of-use asset value by a proportionate amount. For example, if the lease liability decreases by 5% based on the lease termination accounting new payment terms, the lessee would calculate a 5% reduction in the right-of-use asset value. Any variance between the adjustment to the asset and the liability should be recorded in current period gain or loss. • A calculation must exist on the lease in order for a termination remeasurement calculation to be completed.

• You can filter your journal entries by year by clicking here and selecting a year, or multiple years, or by entering a date range.
• Any reconciling items should be earmarked for resolution based on your research about the terms.
• Companies should weigh the costs involved in making changes to systems and processes against the potential benefits of doing so.
• In this blog post, we will break down the complexities of termination accounting under ASC 842 and provide practical considerations and best practices for accounting for partial lease terminations.
• Many lease agreements may include an option for either lessees or lessors to terminate the agreement prior to the end of the original lease term.

At the start of year two, Curve renegotiates the contract to lease only two of the factories. In promulgating this guidance, FASB believed that a decision to not sublease the property is separate from the decision to cease using the property. The liability recorded at the cease-use date assumes that the property will be subleased.

The accounting implications of real estate rationalization

Property managers typically have a system in place to handle maintenance requests efficiently. Tenants can usually submit requests through an online portal or directly to the manager. The manager then assesses the issue and either approves immediate repairs or schedules them as needed.

• As a lessee, it’s important to understand how to properly account for partial lease terminations to ensure accurate financial reporting and maintain compliance with ASC 842.
• Therefore, lessees should consider whether rent concessions agreed to before and/or after an official lockdown are also a direct result of COVID-19.
• Remeasuring the lease liability is straightforward as it is consistent regardless of the type of modification, but remeasuring the leased asset of a partially terminated lease can be challenging.
• Generally, payments made to terminate a lease as described above will be deductible for tax purpose when paid.
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• Please note that the accounting considerations below apply to entities that have already adopted ASC 842.
• • A calculation must exist on the lease in order for a termination remeasurement calculation to be completed.

Organizations that devote resources to continuous improvement will realize the greatest long-term benefits from their lease accounting compliance programs. If any of the five questions answer YES, the lease is determined to be a Finance Lease, or a Capital Lease under one of the older standards. It is possible to override the calculated value for these questions, and also possible to just override the type. For audit trail purposes, any time you do so, you will be asked for an Override Reason. In a real estate transaction, you’re often going to leave the Fair Market Value field blank.

Can I Hire a Property Manager for Just Tenant Placement?

If your organization follows the authoritative guidance set by both the IASB and FASB, it may be easier to account for partial terminations consistently by applying the proportionate change in the remaining ROU asset approach. As mentioned above, we split the journal entry for this approach into two steps (above) for clarity. To account for the partial termination of their headquarters lease XYZ Shipping first calculated the net change in their lease liability. Based on the revised information in the amended lease and using their new incremental borrowing rate of 3.75%, Shipping XYZ calculated their new lease liability to be $4,310,323.30 (decrease of $1,891,339.79). An example of a change that would not call for modification would be one solely related to variable lease payments tied to an index or rate, which would be treated as a variable lease cost adjustment, not a modification. Lease modifications are any changes to the terms and conditions of a lease.

Common examples include extending or shortening the lease term, adding or removing assets/spaces and changing lease payments. New lease accounting standards could impact balance sheets and financial reporting, and present implementation challenges. Your platform can hold a schedule of discount rates based upon organization, country, currency, lease term, etcetera. The platform will automatically look at all of that information and then select from the table the appropriate rate. But, you don’t have to use the number that the platform has come up with, you could select something different. If you do override the populated default rate, the platform will ask you for an override reason.

2 Accounting for a lease modification – lessee

We should spend a minute here talking about fair market value and useful life. The useful life for this lease is 39 years because this is a real estate lease. We use 39 years because that’s the amortization period for real estate https://www.bookstime.com/ in the US Tax code. Regardless of the default value, you should enter the life specific to the asset. It’s important for the Lease Type Test, and also used for determining amortization of assets purchased at the end of the lease.