tag:blogger.com,1999:blog-7390689584378451863.post1558028199063558410..comments2023-05-08T08:09:25.972-04:00Comments on Lease Accounting blog: Overview of the new standardKelvin Smithhttp://www.blogger.com/profile/00766330254970012724noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-7390689584378451863.post-47790678085904378322016-01-04T22:13:08.818-05:002016-01-04T22:13:08.818-05:00Looking at this a bit more, I think my Dec. 26 ans...Looking at this a bit more, I think my Dec. 26 answer was inaccurate. I misread the section on transition as referring to new leases. For leases carried over from the current standard, the recognition would still be straight line (as it is now), but calling it a reduction of rent is inaccurate, since there is no rent expense in the new standard; it's "lease expense," for a combination of the calculated interest and depreciation taken. For leases entered into under the new standard, I think your understanding is correct.<br /><br />To make the journal entries work when the incentives are known at inception, think of the incentive as negative rent, reducing the first rent payment. So instead of the first rent payment being a debit to liability and credit to cash (first day of lease, so no interest has had time to accrue), there is an additional debit to cash, reflecting the incentive. (You can, if you wish, combine the two cash entries, but separating them makes it easier to see what's happening.) As the incentives are used, you would credit cash and debit leasehold improvements (to be amortized over their life), or simply expense them.<br /><br />With an adjustment like this, the asset and liability get set up at inception equal to each other, and there are no further issues later in the lease life. The liability and asset might actually not change, if the imputed interest rate is high; the result of recognizing the TIA would simply be a reduction in the calculated interest (both rate and dollars paid).Kelvin Smithhttps://www.blogger.com/profile/00766330254970012724noreply@blogger.comtag:blogger.com,1999:blog-7390689584378451863.post-53995118645217432532016-01-04T13:17:59.086-05:002016-01-04T13:17:59.086-05:00Ok, thanks! Per the initial draft, Incentives were...Ok, thanks! Per the initial draft, Incentives were initially supposed to reduce the ROU asset only. This treatment made complete sense. However, in subsequent meetings, they concluded that the timing of payment of the incentives matter. Incentives received prior to commencement reduce both the Asset and the liability, while incentives received after reduce the asset only (I may have reversed these). Either way, the accounting (journal entries) for reducing both the asset and liability simply does not work out.Georgehttps://www.blogger.com/profile/05689211849748916658noreply@blogger.comtag:blogger.com,1999:blog-7390689584378451863.post-26121395617016511622015-12-26T00:31:50.019-05:002015-12-26T00:31:50.019-05:00I'm not aware of any change in treatment of te...I'm not aware of any change in treatment of tenant improvement allowances under the new standard. They are recognized straight-line over the lease term, generally as a reduction of rent.<br />Note, though, that the definition of the lease term may include option periods if the improvements are substantial enough that they financially compel renewal. This is part of existing GAAP (it's an issue that blew up in 2005, when the SEC's Chief Accountant wrote a letter to the AICPA emphasizing it, causing a number of companies to have to make material restatements of their lease portfolios).Kelvin Smithhttps://www.blogger.com/profile/00766330254970012724noreply@blogger.comtag:blogger.com,1999:blog-7390689584378451863.post-49474942918560747732015-12-25T04:26:00.115-05:002015-12-25T04:26:00.115-05:00How are TI Allowances supposed to be treated? I un...How are TI Allowances supposed to be treated? I understand that under the new rules timing of the payment matters. Georgehttps://www.blogger.com/profile/05689211849748916658noreply@blogger.com