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LeaseCrunch Blog

Read about ASC 842 & other lease accounting topics

Leasehold Improvements Accounting and Amortization Under US GAAP

Leasehold improvements and lease incentives sound like they would be incredibly similar things when viewed through the lens of lease accounting. 

In fact, there can be overlap between the two terms. Leasehold improvements can be lease incentives, but not always. Likewise, a lease incentive can include leasehold improvements, but not always. Determining when to apply accounting for leasehold improvements vs. lease incentives depends on the specific circumstances involved. 

Read on to learn when they overlap and the implications of defining costs as leasehold improvements vs. lease incentives.

Are Leasehold Improvements Considered Lease Incentives?

Capitalization and Amortization

If leasehold improvements exceed the corporate capitalization limit, they should be capitalized. If the total amount spent is lower, they are charged as an expense in the period in which they were incurred. 

When leasehold improvements are capitalized, they should be amortized over either the course of their useful life or the remaining term of the lease, whichever is shorter.

Examples of Leasehold Improvements

Here are some examples of how and why leasehold improvements come about.

Example 1: Sometimes, landlords pay for leasehold improvements to encourage tenants to rent for longer. For example, say a business owner leases a building so they can run their outdoor gear store. The landlord may decide to build a custom wall for hiking shoes in order to encourage a lessee to remain in the space.

Example 2: When contracts come to renewals, lessees can also negotiate contract terms using leasehold improvements. For example, let’s say a landlord is renting out an open office space to a company. To encourage the tenant to stay, the landlord agrees to add conference rooms, a front desk, and a kitchen area for the lessee. 

In some circumstances, the lessee pays for leasehold improvements. When this happens, these improvements should be capitalized separately from the lease itself. In other circumstances, the lessee might receive funds from a landlord that can be used for leasehold improvements. These funds are considered lease incentives and reduce the right-of-use assets recorded on a lessee’s balance sheet. Overall, a leasehold improvement is any improvement that benefits a tenant. But what happens to these improvements when a lease expires?

What Happens to Leasehold Improvements When a Lease Expires?

Once a lease ends, improvements made by the lessee belong to the landlord, unless something different is specified in the agreement. 

If the tenant can take the improvements with them, they are required to do so (unless the contract says otherwise.)

What is the Difference Between Tenant Improvements and Leasehold Improvements?

There is no difference between tenant improvements and leasehold improvements; tenant improvements is just another word for leasehold improvements.

Working With LeaseCrunch

Leasehold improvements can sometimes complicate the lease accounting process, which can make investing in lease accounting software an advantageous decision. 

LeaseCrunch’s lease accounting software helps entities save time and cut back on errors when it comes to their lease accounting. In fact, LeaseCrunch saves organizations time for even just one lease.

Calculate how much time you could save with LeaseCrunch using our free calculator, or request a demo of our software to see how it could work for you.

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