Needsspace Leases Case Study

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Memo Date: 7/10/2013 Re: NeedsSpace Lease Provisions ________________________________________ NeedsSpace has entered into a lease agreement with WeHaveIt to rent space for its corporate offices. The lease is classified as an operating lease with a term of ten years and no option to renew. NeedsSpace has placed into service a few leasehold improvements such as temporary walls, HVAC, and carpeting. The leasehold improvements have economic useful lives of ten years. There are two provisions in the lease agreement NeedsSpace needs to be aware of: (1) “Lessor may require the lessee to perform general repairs and maintenance on the leased premises;” and (2) “Lessor may require the lessee to remove all leasehold improvements such that…show more content…
NeedsSpace should clarify with WeHaveIt about the statement “general repairs and maintenance” and what is specifically makes NeedsSpace liable for. If the lease required NeedsSpace to make deposits and set up a “repair and maintenance reserve,” the deposits would be recognized as an asset and reimbursed at the conclusion of the lease, less any repair and maintenance costs (ASC 840-10-5-9a to 9c). Since the lease does not explicitly require NeedsSpace to make maintenance deposits, NeedsSpace should expense any repairs as they are performed so the money is sitting in their bank account, not WeHaveIts account. Also, it should be noted that “the accrual method of accounting for planned major maintenance activities is prohibited in annual and interim financial reporting periods” (ASC 360-10-25-5). Therefore, NeedsSpace would not be able to set up an account that allows them to account for future…show more content…
Since NeedsSpace neither has the option to renew the lease nor the ability to negotiate for renewal, it is probable that WeHaveIt will want the premise restored back to its original condition. Hence, there will be a loss from the removal of the leasehold improvements when the lease expires in ten years. Leasehold improvements in operating leases are amortized over the shorter of (1) the useful life of the assets, or (2) the lease term that is deemed reasonably assured at the date the leasehold improvements are purchased (ASC 840-10-35-6). In this lease, the useful life of the assets is the same as the length of the lease term. Therefore, NeedsSpace should amortize the leasehold improvements over ten years. Assuming WeHaveIt exercises the second provision when the lease term expires, NeedsSpace is contractually obligated to remove the leasehold improvements (410-20-15-3e). NeedsSpace will then recognize the fair value of the liability as an asset retirement obligation (ARO) in the period it is incurred and reasonably estimable (ASC 410-20-25-4). Since the liability is recognized as an ARO, we record the liability in conjunction with the amortized leasehold improvements (ASC

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