Q&A (back to index)
Leasehold Improvement Depreciation
Posted by bboyd on 06/27/2008 - 08:16
Our business leases a building with a 20 year term and two 5-year option periods. Is it acceptable to depreciate our leasehold improvements over a 30-year period, as they will be fairly extensive costs over the next few years?
Bonnie Boyd
- 1617 reads
- login or register to post comments
- Add to a social bookmarking site
Amortize over 20 years
Bonnie,
In 2005, there were numerous public companies that had to restate their financial statements related specifically to your question.
Below is an excerp from a letter sent to tha AICPA from the SEC.
In recent weeks, a number of public companies have issued press releases announcing restatements of their financial statements relating to lease accounting. You requested that the Office of the Chief Accountant clarify the staff's interpretation of certain accounting issues and their application under generally accepted accounting principles relating to operating leases. Of specific concern is the appropriate accounting for: (1) the amortization of leasehold improvements by a lessee in an operating lease with lease renewals,...
The staff's views on these issues are as follows: 1. Amortization of Leasehold Improvements - The staff believes that leasehold improvements in an operating lease should be amortized by the lessee over the shorter of their economic lives or the lease term, as defined in paragraph 5(f) of FASB Statement 13 ("SFAS 13"), Accounting for Leases, as amended. The staff believes amortizing leasehold improvements over a term that includes assumption of lease renewals is appropriate only when the renewals have been determined to be "reasonably assured," as that term is contemplated by SFAS 13.
Reasonably assured in most cases will not apply, so the amortization period would be 20 years.
Dan W., CPA, Indiana
FAS 13
FAS 13 paragraph 5f discusses the impact of a renewal option on the determination of whether a lease is a capital or operating lease. It defines a "lease term" as the fixed non-cancelable term plus:- bargain renewal options- all periods for which failure to renew imposes a penalty- guarantees by lessee or lessor's debt.You should read FAS 13 for additional guidance but I would think that this same guidance could apply to determining the lease term for leasehold improvement purposes and then discuss with management their intent.