How to account for tenant allowance asset under ASC 842?

June 2024 · 4 minute read

How to Account for Tenant Allowance Asset under ASC 842?

The implementation of the new lease accounting standard, ASC 842, has brought significant changes to how organizations account for leases and related assets and liabilities. One specific area of focus is the accounting treatment of tenant allowance assets. Tenant allowances, often provided by landlords to tenants for leasehold improvements, are an important consideration in lease agreements. In this article, we will explore how to account for tenant allowance assets under ASC 842.

Table of Contents

How should tenant allowance assets be initially recognized?

Under ASC 842, tenant allowance assets should be recognized as a separate asset from the right-of-use (ROU) asset, if it meets the definition of an asset and satisfies certain recognition criteria. Tenant allowances are usually directly associated with leasehold improvements and should be recognized when it is deemed probable that the reimbursement will be received and the lessee has incurred the related qualifying leasehold improvement costs.

How should tenant allowance assets be measured?

Tenant allowance assets should be measured at their fair value, which is the amount expected to be received from the landlord. If the fair value of the tenant allowance asset cannot be determined, the lessee should recognize the tenant allowance as a reduction of lease payments.

How should subsequent measurement of tenant allowance assets be performed?

After initial recognition, tenant allowance assets should be measured using the cost model or the revaluation model, depending on the lessee’s accounting policy for right-of-use assets. The cost model measures the asset at cost, less accumulated depreciation and impairment losses, while the revaluation model allows the tenant allowance asset to be carried at fair value.

How should lessees account for changes in tenant allowance assets?

If there are changes in the estimated reimbursement from the landlord, lessees should recognize the impact as an adjustment to the tenant allowance asset. Any adjustments should be made prospectively.

What are the considerations for subsequent measurement of lease liabilities when tenant allowance assets are recognized?

When tenant allowance assets are recognized, lessees should also consider the impact on their lease liabilities. The lease liability should be adjusted for any change in the reimbursement expected from the landlord, which would affect the total consideration included in the lease liability.

Can tenant allowance assets be amortized?

Under ASC 842, tenant allowance assets should not be amortized separately from leasehold improvements. Instead, the combined asset, which includes the tenant allowance asset and the related leasehold improvements, should be amortized over the shorter of the lease term or the useful life of the leasehold improvements.

How should the amortization of tenant allowance assets be recorded?

Lessees should record the amortization of tenant allowance assets as depreciation expense, either in accordance with the cost model or the revaluation model, depending on the accounting policy for right-of-use assets.

What disclosures are required for tenant allowance assets?

ASC 842 requires lessees to provide qualitative and quantitative disclosures about tenant allowance assets. This may include information about the nature of the assets, the assumptions used in measuring them, and any significant changes to the carrying amounts of these assets.

How should lessors account for tenant allowance assets under ASC 842?

Under ASC 842, lessors are required to allocate the total consideration in a lease contract between the lease components and any non-lease components, such as a tenant allowance. Lessors should recognize any tenant allowance as a reduction of lease revenue.

Are there any exceptions to the recognition of tenant allowance assets?

Yes, there are exceptions. Tenant allowances that are not directly associated with leasehold improvements, such as those provided to incentivize a tenant to enter into a lease, should not be recognized as assets under ASC 842.

How should changes in tenant allowance assets be accounted for by lessors?

If there are changes in the estimated reimbursement to the tenant, lessors should recognize the impact as a change in lease revenue. Adjustments should be made prospectively.

What are the key impacts of accounting for tenant allowance assets under ASC 842?

The accounting treatment of tenant allowance assets under ASC 842 requires lessees to recognize and measure these assets separately from the right-of-use asset. This change may result in a different financial reporting outcome compared to previous lease accounting standards, and organizations should ensure compliance to accurately reflect the financial impact.

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