Lease Accounting: Another Reason To Change It

The FASB has been going back and forth on a new accounting standard for lease accounting.  I for one was glad to see them back off of their proposal to force every lease onto the balance sheet.

I'm in the midst of an audit on a client with lots of leases.  As they are in the restaurant industry, most of their locations are conducted from leased facilities.  Every lease has rents that increase every year.  Some of them had tenant improvement allowances.  Some of them had a few months free rent.  Which means they get to deal with lots of the fun parts of the proncouncement formerly known as SFAS 13:

  • They straight-line their GAAP rent expense based on the total expected cash flows, and in the early years build up a liability for the difference between the GAAP expense and the actual cash payments.
  • The tenant improvement allowance is taken into income over the life of the lease.

This is all works fine when you have the lease go to termination.

Except in 2010 they got, and took, the opportunity to buy one of the buildings.

I was looking at the rent expense for the various locations and saw a big credit balance in the rent expense account for that location.  Why?  Because they had to get rid of the deferred liabilities for the difference between GAAP expense and cash and for the remaining tenant improvement allowance.

I don't like the whole straight line approach.  I don't think it matches expense with revenue.  I don't like how if you go from one lease one year to a new lease the next year that your rent expense can skyrocket.  I think none of this makes sense.

And I think that this big credit balance this year is the icing on the cake.  It just doesn't make sense.

I hope that as the FASB (and the IASB which seems to own the FASB now) fix this one with the new standard.

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Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies. Joel writes observations on different matters and especially on working with and using LinkedIn. He thinks he has a sense of humor.

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