Please note that the accounting considerations below apply to entities that have already adopted ASC 842. Entities that have not yet adopted ASC 842 should work with their accounting advisers to determine the impact of real estate rationalization under ASC 840. That’s because, unlike other modifications where there is no income statement impact, with partial lease termination, there is. Because there are https://turbo-tax.org/law-firms-and-client-trust-accounts/ various options to terminate a lease, it’s important to understand the accounting treatment of an early termination under the respective new standard. However, subsequent to this determination, there may be circumstances that change the initial determination of whether these options would be exercised, and if so, when. This article presents information on terminations, specifically partial terminations.
Create your free account to get started with journal entries, amortization schedules and more. However, for the purposes of this article the termination and the accounting https://turbo-tax.org/top-5-legal-accounting-software-for-modern-law/ recognition of the termination occur at the same time. Accounting guidance for this situation can be found at ASC Section 420 Exit or Disposal Cost Obligations.
Implementation considerations for entities that have not yet adopted ASC 842
A full termination will result in the lessee relinquishing the right to use the entire leased asset. This requires the lessee to derecognize the full right-of-use asset and lease liability. Any difference between the balances of the lease asset and liability as of the date of termination will result in a gain or loss recognized on the income statement in the period of termination.
From the perspective of a lessee, the accounting for the early termination of an operating lease is consistent with that of a finance lease. IFRS 16 requires the use of the second approach when accounting for a partial termination. If your organization follows the authoritative guidance set Whai is Law Firm Accounting: Best practice 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 we have noted above the impact to the lease liability ($8,878,204) is consistent regardless of the approach selected.
Accounting for Lease Termination Costs
While there are two acceptable approaches to measure the ROU asset under ASC 842, IFRS 16 only has one option – to reduce the ROU asset by the proportionate change in the remaining ROU asset. Example 17 – Modification That Decreases the Scope of the Lease within IFRS 16 illustrates the approach to account for for partial terminations. As above, the difference between the reduction in the liability and proportionate change in the ROU asset will be recognized as a gain or loss (IFRS 16.46). Similarly, rent review dates can impact lease liability and right-of-use asset calculations because they determine when rent escalations occur.
In this blog, we will address the accounting for a partial termination of a lease under ASC 842 and IFRS 16. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.
Automate your lease accounting. Remove manual error.
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 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.
Although the rent expense running through the income statement is the same, the need to account for the balance sheet accounts over the term of the lease requires additional calculations and entries to be made each period. Lessee LE entered into a lease with Lessor LR to lease one floor in an office building for 10 years. LE’s business has since expanded and LE now requires additional office space. At the beginning of Year 6, LE and LR agree to amend the contract to grant LE the right to use an additional floor of office space in the same building for 5 years. The lease payments for the additional office space are $100,000 per year, which is commensurate with the market rental price for similar office space. To account for the partial termination of their headquarters lease XYZ Shipping first calculated the net change in their lease liability.