By Ane Ohm on February 17, 2023 at 11:17 AM
Leasehold improvements are improvements made to leased property sometime over the course of the lease. Leasehold improvements are considered assets, so they are accounted for as fixed assets under primarily ASC 360, ASC 840, and ASC 842.
These improvements may sound rudimentary, but they can often result in some complicated lease accounting. Let’s run through the basics of accounting for leasehold improvements.
Accounting for Leasehold Improvements
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.