Recognition
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      Are Leasehold Improvements (TI's) Considered Lease Incentives?

      Under ASC 842, leasehold improvements are not necessarily lease incentives.

      Lease incentives are payments made to or on behalf of the lessee by the lessor for expenses that would have otherwise been covered by the lessee in relation to the underlying asset and lease contract. Most often, this includes cash reimbursements for moving expenses or the lessor assuming payments for the lessee's pre-existing lease.  Leasehold improvement allowances qualify as Lease Incentives if the assets obtained through the allowance are considered to be owned by the lessee. 

      Leasehold improvements qualify as Lease Incentives if:

      • Lessee has discretion on use of cash incentives

      • Lessor does not take ownership of improvements 

      Conversely, if the lessor takes ownership of the improvements or includes specific obligations to the lessee for direction of the funds, the leasehold improvements most likely do not qualify as Lease Incentives. The lease accounting by the lessee is not affected. 

      If the lessor owns the improvement and lessee pays, lessee records a prepaid asset at the time of payment and adjusts at the time of receipt of reimbursement from lessor. This is not processed in LeaseCrunch software. 

      What if Leasehold Improvements Qualify as Lease Incentives?

      If leasehold improvements qualify as Lease Incentives for the lessee, the value of the incentive flows through as a reduction in the calculation to recognize the ROU Asset.  It does not affect the calculation of the associated lease Liability if the incentive is received on or before the commencement of the lease. 

      If the incentive is received after the commencement of the lease, it is considered a reduction in the calculation of the Liability along with the ROU Asset, therefore entered as a negative lease payment on the Lease Payments & Classification tab of Add/Edit Lease as of the date reimbursement is expected."

      Leasehold Improvements can be lease incentives however if the lessor does not pay the lessee at or before commencement of the lease, accounting for the improvement allowance is not done as an incentive.

       

      More information is available in our blog Leasehold Improvements Accounting and Amortization Under US GAAP