What is lease abandonment? Is it similar to lease impairment? How do you account for an abandoned lease? These are questions we will answer in our latest blog, so whether you’re a lessee or a lessor, you know what to do when dealing with an abandoned lease.

What is Lease Abandonment?

An abandoned lease is one where the lessee, also known as the tenant, decides to cease the use of an ROU asset immediately or at a future date. The decision to abandon an asset is an indicator of impairment for a held and used long-lived asset. When a lessee ceases the use of an ROU Asset, but intends to sublease the asset, the asset is not considered abandoned.

When a lessee determines it has or will abandon the ROU Asset, it should reassess the lease term if any of the following conditions exist: 

• A significant event or change in circumstances within the control of the lessee that directly affects their reasonable certainty to exercise or not exercise an option to extend or terminate the lease.
• An event is written into the contract that obliges the lessee to exercise or not exercise an option.
• The lessee elects to exercise an option where they previously were not reasonably certain to do so.
• The lessee elects not to exercise an option where they were previously reasonably certain to do so.   

If the lease term changes, then the lessee also reassesses the lease classification. 

What is the Difference Between Lease Impairment and Abandonment?

A lease impairment is when the carrying amount of the asset exceeds its recoverable amount. It is recognized as a reduction of the ROU Asset and a recording of an impairment loss in the financial statements.

Lease abandonment is different because it relates to the lessee's decision to stop using a leased asset before the end of the lease term. Ceasing to use the ROU Asset is an impairment indicator unless the lessee intends to sublease the asset. 

How to Account for Lease Abandonment

In our example for how to account for lease abandonment, let’s begin with the facts and circumstances of an existing lease. These are as follows: 

• A 5 year lease term was entered into on 1/1/24.
• Payments are $15,000 per year with a 5% annual increase. Payments are made at the beginning of each year. 
• The lessee could not determine the implicit rate in the lease so they have chosen to use the Incremental Borrowing Rate of 8% as per their policy elections.
• The lease is classified as an Operating Lease.

As of 1/1/24, the beginning balances for the lease are as follows:

• ROU Asset $70,567
• Lease Liability $55,567

At the beginning of year 3, the lessee decides they will stop utilizing the asset after the end of Year 3 (12/31/26). They are unable to sublease the asset. This means the asset will be abandoned after year 3, a date known as the cease-use date.

Assume that there is no impairment to the asset group for the ROU Asset and there are no changes to the lease payments or how the lessee will use the asset for Year 3. 

At the cease use date, the lessee reduces the ROU Asset to zero with no change to the Lease Liability. The Journal Entry as of the end of Year 3 to write off the ROU Asset is as follows: 

• Loss on Abandonment $32,911.31
  • ROU Asset $32,911.31

Invest in LeaseCrunch to Simplify Lease Abandonment Accounting

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LeaseCrunch is proud to not only offer top-notch, compliant, and automated lease accounting software but also white-glove customer support, which our clients consistently cite as one of the best parts of their experience with our software.

The benefits of using LeaseCrunch include:

1. A quick implementation process: We offer in-app help links and a friendly little wizard to guide you through the process of set-up. 

2. An easy-to-use design: You don’t have to compromise between easy accounting and accurate accounting. Our software crunches the hard numbers and does it with accuracy, all behind the scenes. The extent of lease accounting work you have to do is interacting with our user-friendly interface and in-line resource guides.

3. Personalized Customer Service: Every time you have a question, you’ll get an answer from an expert at LeaseCrunch. We ensure each of our clients gets fast, white-glove service.

4. Accuracy and compliance: Data validation checks are integrated into our software to ensure compliance with accounting standards. The creation of our software was a collaborative effort between CPAs with experience in both the public and private accounting worlds, and software professionals who ensured the ease of use, accuracy, and security protocols are top-notch.

5. Secure: We embed security measures in our software, such as single sign-on (SSO), in order to keep your important financial information safe.
6. Customizable: Continually scale our software to match your company’s growing size.
7. Efficient: The end goal for the companies who utilize our software is to ensure that they never have to do a manual calculation for lease accounting again. Tools such as our automated quantitative footnote disclosures and leasing software wizards for classification and lease term assistance help to relieve the responsibility and risk associated with manual lease accounting calculations. Along with that comes the elimination of manual data entry errors and the increase in the accuracy of your company’s financial statements.

Contact us today with any questions you might have, or to schedule a demo.

FAQ’s

How are operating lease liabilities recorded on the lessee's balance sheet under ASC 842?

Operating lease liabilities are recorded as short-term and long-term liabilities at the commencement of a lease. They are reduced throughout the lease term.

How to account for abandoned assets

Follow the guidelines we set in the example above, ensuring proper documentation of differing variables based on your unique lease agreement, while taking any lease impairments into account as well.